In a tough job market and facing an uncertain future, luxury goods are not going to see the sales they have a couple years ago. Therefore, companies that sell higher end clothing, cars, jewelry and gadgets will need to cut costs and create efficiencies while waiting for income to increase. Although video game makers do fall into the luxury goods category, gaming consoles have continued to sell units because they can sell games at relatively low prices in order to generate steady income.
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However, when considering the major gaming systems such as the Sony PlayStation 3, Microsoft Xbox 360 and Nintendo's Wii, if you need to upgrade this will involve paying for an entirely new system. A computer on the other hand can be incrementally upgraded. For example, graphics processors are a cheap and easy upgrade with graphics cards or memory. Companies that produce graphics cards sign major contracts with computer companies, but they also sell them directly to the users. When the economy strengthens, these are the tech companies worth watching.
Advanced Micro Devices (NYSE:AMD) is one of the main graphics cards producers. As games increase their quality, these cards will need to be upgraded. In its first quarter ending March 27, net income attributable to common share holders was $275 million of 35 cents per diluted share excluding extraordinary items, a loss of eight cents including these items. This was on $1.6 billion in revenue. In the same quarter a year earlier AMD lost 66 cents per diluted share excluding extraordinary items on $1.2 billion in revenue. It currently sells with a P/E of 6.2. On one hand these graphics cards could be seen as an unneeded expense, but when you compare it to purchasing a new computer or system, these cards are a small price to pay. They will end up being purchased to stretch the life of the system. (Learn more in our Investing Tutorial.)
AMD's major competition is NVIDIA Corporation (NYSE:NVDA). Nvidia has a much higher P/E at 22.6 and released quarterly results for the period ending May 2, 2010 with diluted earnings per share of 23 cents on $1 billion in revenue. Last year's comparable period net income was a 37 cent per diluted share loss on $664 million in revenue. Over the last five years the annual revenue growth rate sits at 10.6%. Nvidia did express concerns over the potential reduction in sales of computers which could negatively impact sales or license of products directly designed for desktop computers.
Intel (NYSE:INTC) and AMD are both potentially going to produce a more integrated product for desktops. This would come in the form of a central processing unit CPU and a GPU on the same chip. Nvidia would have a tough time keeping up without further advancements in their product offering.
The Bottom Line
High tech gadgets and gaming platforms are luxury product not considered recession proof. Before entering these markets a recovery needs to be under way. When jobs numbers start increasing, and the economy turns the corner, keep an eye on these firms and the companies they sign contracts with, the two will go up in tandem.
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