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Tickers in this Article: GME, ERTS, ATVI, MSFT, NTDOY, SNE, NFLX, BBY
During the global crisis, consumer discretionary spending took a huge hit. Almost all segments of the market were affected. However, with the upbeat reports about jobs and the state of the economy coming out these days, the American consumer seems more apt to part with some hard-earned cash. After an abysmal 2009 followed by mixed results in first half of 2010, the video game segment may have finally begun its turnaround. U.S. retail sales of game software, hardware and accessories saw an uptick in March and many analysts are predicting strong upward pricing within stocks in the sector.

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Higher Sales at the Home Arcade
Looking at the total segment, sales hit $1.52 billion dollars in the first quarter of 2010 and the all-important game software sales numbers increased by 10% to $875.3 million, versus $795 million the same period in 2009. Sony's (NYSE:SNE) "God of War 3" made a large impact on the revenue generated in the sector, as did Pokemon games from Nintendo (OTC:NTDOY), which highlighted the increased returns. March also saw positive growth the industry; sales were up 6% compared with the 2009 numbers.

Hardware and higher margined accessories sales were mixed as the physical game consoles dropped 4% to $440.5 million and accessories rose 11% to $206.8 million. Nintendo led the way again with Microsoft's (Nasdaq:MSFT) Xbox 360 in second place. (For further read, check out Power Up Your Portfolio With Video Game Stocks.)

Catalysts for a Growing Year
The sector could see some higher stock prices in the upcoming months as consumers continue to spend on entertainment. The jump in software sales significantly surpassed analyst's estimates of 3% growth in the sector just in time for earnings season for the publishers and hardware makers. The highly watched consumer electronics trade show E3 will occur in early June and showcase new motion control products from Sony and Mr. Softy.

In addition, Netflix's (Nasdaq:NFLX) recent partnership deals with Nintendo and Microsoft to provide streaming movies to their consoles may turn video games into more of a family device rather than just a toy for kids. This could help revitalize sagging hardware sales.

A Few Portfolio Power Plays
A strong catalog of games is expected throughout the rest of 2010 as well as some new innovative hardware devices. This, plus growing consumer confidence, could be enough to re-energize the video game sector and drive share prices higher. Investors may want to add some shares of the publishers and game retailers to their portfolios to benefit.

Activision Blizzard (Nasdaq:ATVI) has the distinction of having one the highest selling video game franchises in "Modern Warfare 2" as well as one of the games with some of the most fanatical players in "World of Warcraft". Strong sales and monthly subscriptions have helped translate into profits as the company preannounced higher-than-expected earnings. While analysts were forecasting EPS of only 5 cents, ATVI surprised investors by beating those expectations by 60%.

Receiving a recent upgrade from analysts, GameStop (NYSE:GME) is the world's largest retailer of video games with operations across 17 countries. While it makes most of its money in new sales, GameStop is also the leader in the used and resale video game market, from which it earns 26% of its gross profit. The used segment of the video game market is one that many other retailers, such as Best Buy (NYSE:BBY), have failed to conquer, helping fuel rumors that the company could be a takeover target. GameStop holds $5.39 per share in cash and trades at a cheap P/E of 11. Shares are a direct play on the video game market throughout the year.

Finally, publisher Electronic Arts (Nasdaq:ERTS) received an analyst upgrade citing an improved outlook on key titles. EA sports titles have dominated the best-sellers' lists for quite some time.

Bottom Line
Consumer confidence has returned to home entertainment and the video sector saw positive results for the first time in many months. The boost in sales could be seen as a positive moving forward throughout the year. Both Activision and GameStop could make good portfolio plays as the industry is expected to return to growth throughout 2010. (Do you love playing video games so much you wish it could be your job? Read Play Video Games; Become A Millionaire.)

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