Seeking Alpha
Profile| Send Message|
( followers)  
This holiday season is a clash of titans in the video game industry - not just in the console market, but also in the software and retail business. So how can investors look to play this hot part of the market?

First, let's look at all the news and buzz of late. Microsoft (NASDAQ:MSFT) came out with its new generation console, XBox 360, last year and has successfully taken some market share from Sony (NYSE:SNE) and Nintendo (OTCPK:NTDOY).

Microsoft has also released a video game for XBox 360 called Gears of War, that has in its first two weeks since release, sold a million copies. This is a game that has been crowned by over 45 publications as the best next generation game, with an average rating of 95 on the popular, giving the game one of the best reviewed games of all time. This game alone has convinced people to switch console loyalties.

Additionally, Microsoft has recently announced that it can reduce costs on the production of the XBox 360, which means that price cuts are not too far off. And why not, the software giant has finally made its way into millions of living rooms, allowing it to now sell video and other programming to the gamer audience. In other words, they have replicated Apple's (NASDAQ:AAPL) iPod/iTunes combo on TV where users can pay for movies, games and more. Amidst all this, Sony released its much anticipated and overly expensive Playstation 3, but it was introduced in short supply, and some bugs. Some of the shine was taken off Sony's release by Nintendo's Wii, which looks to alter the landscape of video gaming with its motion detector controller. Now, Apple is rumored to be looking into creating its own video game console.

All of the above consoles and the next generation games have seen video game retail sales jumped 34 percent in November, with console sales more than double last year's results, according to data from the NPD Group, a market research company. Total hardware sales soared 69 percent including a 26 percent jump in portable handheld video game consoles and over 100% increase in sales of non-handheld consoles. Following are some of the unit sales numbers for the top selling consoles:

Nintendo DS - 918,000 units
Sony Playstation 2 - 664,000
Microsoft XBox 360 - 511,000
Nintendo Wii - 476,000
Sony Playstation 3 - 197,000

Software sales climbed 15 percent primarily due to Gears of War, followed by Final Fantasy XII, Legend of Zelda by Nintendo for the Wii and Activision's (NASDAQ:ATVI) Guitar Hero.

So who will benefit from all the companies involved in this buzz?


Sony: SNE has been a terrible stock of late. With its business units working in silos, a lot was expected of Howard Stringer, their British CEO who took the helm some 3 years ago. Alas, he has not really managed to get Sony past its woes. The wide notebook battery recall and the Playstation 3 delays are just two of the few incidents Sony has had to contend with.

Not to mention that Sony completely missed the boat on the early adopters of plasma and LCD TVs. However, looking at Sony's expected earnings next year, I believe analysts are selling this company short (no pun intended). After all, this is Sony and sooner or later, it will bounce back. If Playstation 3 supplies pick up, and Sony gains market share in the flat screen market, they are sure to do better than most people expect, considering some big titles including Spiderman 3 are due to be box office hits next year. At around $40, Sony is a buy, but investors will have to be patient, and the stock could yet come in a little more.

Nintendo: While I think the stock has no where but to go up with its successful DS and Wii, the company does not trade in the US, and therefore I can't recommend it.

Microsoft: MSFT has already moved up over 40% in the last 6 months. For a company the size of Microsoft, this move leaves no more room to the upside. If only they were to spin off their gaming division, I would be a buyer. XBox 360 is blowing estimates out of the water, and the licensed accessories, games, content and downloadable trailers and movies are a home run.

Apple: This is not a video game pureplay, but the strength behind the iPod makes it intimidating in the eyes of competition, and for good reason. If it is indeed going to have its own gaming console, I would buy it now and more of it, every 2 points that it goes down. I last recommended it at $80 back on Oct 20th and had mentioned that it could hit $120 and even $160 by end of next year. I still maintain that.

Activision: This stock has moved up almost 80% in the last few months, but that is due to the strong video game sales projected by analysts. With Guitar Hero and Call of Duty 3, it has a great portfolio of titles to look forward to and is a winner. The stock is a buy in my opinion.

Take Two (NASDAQ:TTWO) : Here is a stock that I recommended back on Sept 29th, less 3 months ago, when it was under $15. The stock hit $20 last week, and I would be taking some profits here as the year comes to an end. Its other franchises like the 2K Sports have not done as well as expected and the stock is a little ahead of itself here. Next year, they plan to release a new version of GTA, but I am giving up on this one-trick pony for now. One of the reasons it has gone up is because the entire sector has run up.

Electronic Arts (ERTS):
Too loved, too predictable and no creativity. I am tired of the same old games appearing with new titles. They are a big company and need to do bigger things than what they have lined up. I would pass on this one.

Best Buy (NYSE:BBY): With electronic gadgets being the hottest purchase this holiday season, Best Buy stands to gain everything and lose nothing. Ipods, Blackberrys, Flat Panel TVs, Video Game Consoles, Software, Accessories - all these expensive toys help this company sell more extended warranties, a highly profitable business considering the declining margins on the actual product sales. I recommended this stock back on Nov 26th, and I maintain that this is a great stock to buy.

Gamestop (NYSE:GME): This stock has seen a 60% gain since the summer lows and again reflects the gains seen sector wide. It is certainly not my favorite stock of the ones mentioned here, but I would not bet against it. At 21 times 2007 earnings, it can go higher still, specially considering that people would be anxious to trade/buy/sell used's video games with the new generation ones going for almost $60 per game.

Make no mistake, the entire sector is on fire with most of the software and retail stocks up huge since summer. However, the likes of Sony and Best Buy present value opportunities for those afraid to chase the already inflated names.

Source: Holiday 'Clash of the Titans' for the Gaming Industry