Blowback from the Japanese crisis is threatening to drain the life from video game stocks. Hot titles and periphery sales might have to stage a rescue or the big three console makers could be forced to cut system prices sooner rather than later. (For background reading, see The Best-Selling Video Games Of All Time.)

Tutorial: The Industry Handbook

Console Wars
Even before the catastrophe in Japan, this year has already been a tough one for most game publishers. Following several downbeat months, the closely watched software sales number fell 5% in February. Although that beat expectations, the flagging growth pattern reflected a relatively lackluster 2011 for new gaming titles. Sustained growth in hardware sales is needed to support software sales, and hardware had been under pressure. (For related reading, see 5 Video Game Stocks To Power Up Your Portfolio.)

That was until the gaming industry got something of a reprieve as hardware sales surged 22% in February. Periphery sales of Microsoft Corporation's (Nasdaq:MSFT) successful Kinect motion controller resulted in a surprisingly strong month for hardware. The Kinect controller bundled with the Xbox 360 boosted the average console sale price. Total industry sales increased 3% year-over-year to $1.36 billion.

But with the yen hitting an all-time high against the dollar, Sony's (NYSE:SNE) PlayStation 3 and Nintendo's (OTC:NTDOY) Wii will be negatively impacted. So will Nintendo's highly anticipated 3DS system, which is set to debut later this month.

Publishers Gearing Up
Improving hardware sales is a major catalyst for software. Upcoming gaming titles - like "The Legend of Zelda: Skyward Sword", which uses the Wii's MotionPlus sensor - will try to capitalize on February's strong peripheral sales. Software sales have lagged this year because there hasn't been a major new game rush. Capcom's "Marvel Vs. Capcom 3: Fate of Two Worlds" was the lone February release that shot up the charts.

Holdovers have accounted for a large percentage of game sales in 2011. Activision Blizzard's (Nasdaq:ATVI) "Call of Duty: Black Ops" rode its fourth consecutive month at the top to become the best-selling game of all time. The success of "Black Ops" pushed Activision to its highest level in 2010 by the end of December, although Activision's shares are now down 15% year-to-date. Still, Activision has made shareholder friendly moves with the recently announced $1.5 billion stock buyback program and 10% dividend boost, which now yields 1.5%. Only Konami (NYSE:KNM) offers a better yield in the publisher space at 3.2%.

Meanwhile, Electronic Arts (Nasdaq:ERTS) is up 12% since the beginning of January. Only "Grand Theft Auto" publisher Take-Two Interactive Software (Nasdaq:TTWO) has outperformed ERTS over the same period, having risen 22%. EA has a blockbuster in the making with "Star Wars: The Old Republic", which will compete directly with Activision's "World of Warcraft" series. With "The Old Republic" and its flagship "Madden" franchise, in addition to recently released "Dead Space 2" and "Bulletstorm", ERTS' diverse game portfolio is becoming very attractive. Moreover, ERTS is aggressively developing titles for the growing mobile market. The company's abnormally cautious full-year guidance issued back in February was actually a net positive for the stock as the company has a track record of over-promising. (For more, see Video Game Industry Betting On A Turnaround.)

The Bottom Line
Software publishers are in position to build on February's hardware sales growth. Forthcoming 2011 releases like "The Old Republic" and Microsoft Games Studios' "Gears of War 3" are potential blockbusters. Add in the growing market for downloadable content, online, mobile and social gaming, and the gaming industry may just have the ammunition to ward off any ill effects from the crisis in Japan.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  2. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  3. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!