A Look at Two Video Game Stocks and What's Next

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While several video game companies, like the once-invincible Nintendo and particularly THQ, have struggled, others have been relatively recession-proof. There has been a secular transition towards mobile and PCs, which has rapidly consumed the console game market. This trend may be accelerated when pay-TV cloud gaming arrives in 2013. Below, I review several producers with this transition in mind.

Activision (NASDAQ: ATVI): Title After Title Is a Success

Following the Sandy Hook elementary school shooting, Activision slid in value due to the increased political scrutiny of shooting video games. While some may attribute this to domestic sales of video game software and hardware dropping by 11 and 13% y-o-y, respectively, in November numerous media reports concerning the effect of regulations could also be responsible. The Supreme Court, however, has been clear that even the most violent video games have a right to be marketed to children as a matter of the First Amendment.

If you look at titles like Call of Duty: Black Ops II, it's hard not associate Activision with the new "Nintendo." This title was a huge success for Activision, selling above $1 billion in the first 15 days--half of it within just the first 24 hours! Some, however, have still lamented the deceleration in sales (well, that's what you should expect to find with such high initial demand). The main point to grasp is that Activision is creating strong pent-up demand, as evidenced by how consumers are rushing to be the first ones to buy new products. With more than $500 million grossed and 7.5 million copies sold, it’s one of the greatest game launches in the game industry, beating Activision’s older game Modern Warfare 3. Microsoft’s flagship game, on the other hand, Halo 4, was expected to sell more than $300 million in the opening week, but it grossed only $220 million on the opening day and $280 million in the first week, $20 million below expectations. Activision’s reported third quarter revenue of $751 million surpassed expectations by 19.8%, and it added $42 million to its $709 million projection.

Both Call of Duty and Diablo 3 went well, but it was the Toys for Bob video game sales that caused such a big increase. After the company decided to revive one of the franchises from its old owner, Vivendi, Toys for Bob showcased yet again that Activision knows how to succeed. In the first quarter of 2012, the game was the third most profitable game in the Americas and Europe. It sold over $30 million in just toys alone, two to three times higher than expected. Activision soon released two more iOS games for Skylanders, titled Battlegrounds and Lost Islands. The first version of Skylanders was reported to cost $5-$7 and will be free to play later. They also added a $50 Bluetooth “portal” to import characters into the game. The mobile version of Skylanders Cloud Patrol sold over 1.5 million downloads. It was also added to Amazon’s Kindle Fire Tablets in early September. If nothing else, this kind of momentum is worth watching to get a pulse of the broader video game industry.

Electronic Arts (NASDAQ: EA): Failing to Keep Up

In an interview, the CEO of EA expressed: "Our [fiscal] Q3 looks soft mostly due to Medal of Honor.Medal of Honor: Warfighter was a critical failure in EA’s 2012 year, but it was a miss in a series of misses, such as a canceled NBA game. EA’s CEO blames most of the company’s fall on a market anomaly, saying: “There's a perception among investors that the gaming industry is tough to invest in right now.” The market remains on the fence with EA (and not Activision) because title launches have failed to catalyze demand. Even social gaming and mobile efforts have not offset poor demand despite a greater interest in buying mobile and digital offerings rather than retail offerings.

As mentioned above, a new competitor to the gaming industry is coming, threatening to overthrow consoles and PCs. Pay-TV cloud gaming is hitting domestic markets this year, and well established companies like AT&T, Verizon, Comcast, and Time Warner are preparing to offer those services. The new cloud gaming may be the final nail in EA's coffin. Could EA go the way of THQ?

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

blog comments powered by Disqus