More Reasons To Avoid This Video Game Giant
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sony (NYSE: SNE) and Microsoft (NASDAQ: MSFT) are both bringing out new versions of their hit video game consoles to much fanfare. Nintendo (NASDAQOTH: NTDOY.PK) brought a new system out last year, and nobody noticed. Its latest move to save the Wii U won't change much.
Nintendo was really the first company to popularize casual games with the launch of its Wii game system. The revolutionary motion sensitive controller captivated audiences and brought a whole new customer base to video games. The Wii was so popular that sales more than tripled between 2003 and 2008, going from $500 million to $1.8 billion.
The company's top line has been in decline since that time and earnings dipped into the red last year. Sales are about a third of their high water mark in 2008. The company launched the Wii U last year, an update of its aging Wii system, but it hasn't resonated with customers. Bloomberg quotes Citigroup as saying that sales of Wii U trail its predecessor's sales trends by 40%, with only about half the number of games sold.
Clearly, Nintendo has a problem on its hands. Sony and Microsoft, meanwhile, are set to make that problem worse later this year. PlayStation 4 and Xbox One are both set to hit stores over the holiday season. The updates in these consoles are making big headlines, as is the fight between the two companies.
The biggest changes are the integration of the Internet, including for game sales, and a shift toward becoming living room media centers. Microsoft has been the more aggressive of the duo on the latter front, designing Xbox One to handle cable box duties among many other mundane chores. Sony, meanwhile, has been working hard to differentiate its product as the best, and cheapest, choice for dedicated gamers before making the living room pivot.
That's given Sony an early leg up. That's important for Sony because it is struggling today. The company's Game unit accounts for around 10% of the company's sales. While that isn't a make or break business, a win here would help turn the company's fortunes on the consumer electronics side of its business. That group has dragged the bottom line into the red for three years running.
Those losses have led hedge fund manager Daniel Loeb to push Sony for a breakup, splitting its successful content business from its struggling electronics arm. The company doesn't want to do that. So, a win with the PlayStation 4 could help Sony give Loeb the brush off. Although the shares have seen a big advance of late, there's still turnaround potential here. Particularly if the new console is a hit.
Microsoft's efforts with Xbox One have upset some core customers because it has leaned too heavily toward the living room in its early marketing. That plus it's priced $100 higher than the PlayStation 4. The company's Entertainment & Devices division made up about 13% of Microsoft's top line last year and the company has more than $60 billion in cash and investments, net of debt, at the end of the March quarter. This launch is important, but Microsoft has the time and money to work through mistakes.
In fact, Microsoft has been bringing a lot of new products out lately, including Windows 8, an updated version of its Windows Mobile, and the Surface. All of those products are more important to the company because they address the mobile shift that's taking place. Xbox isn't an also ran product, but anticipation for the new console isn't what's driving Microsoft shares right now.
That said, investors seem to be getting more comfortable with the operating system giant's mobile efforts. The top line has been heading roughly higher over the last decade, the dividend has been increased annually over that span, and despite an earnings dip in 2012, the company is highly profitable. Growth and income investors should find the company's around 2.7% dividend yield and upper teens price to earnings ratio combines a fair price with a decent income stream.
Nintendo's attempt to fight back is to embrace the casual game market by opening up its Wii U to outsiders in the same way that mobile devices like Apple's iPhone and iPad accept Apps from developers. While that should lead to a flood of game makers redesigning their mobile apps to work on the Wii U, it won't likely lead to an influx of exclusive must-have games.
In fact, offering living room size games that people can already play on their iPhone doesn't seem all that alluring at all. This is likely to be a bad holiday season for Nintendo and the latest push suggests the company has nothing up its sleeve. Investors should avoid the shares until the video game company has something new and exciting to offer.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple and Nintendo. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!