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When NPD reported a massive drop in video games, the decline was significant:

  • December 2011 sales dropped 21% to $3.99B compared to December 2010
  • Hardware sales dropped 28%
  • Accessories dropped 27%
  • 2011 video game sales dropped 8% for the year compared to 2010
  • Downloadable content (known as DLCs) dropped 2% to $16.3-$16.6B

A front-loading of game releases from Activision (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) in November may partly explain the sales drop in December, but 2011 was weak.

Does last month's decline signal a buy for gaming stocks in 2012?

Data:

The product life cycle for hardware is at an end for all three consoles. The sales drop illustrates that a consumer who wants an Xbox, Sony Playstation 3 or a Nintendo Wii already has one. Sales for Microsoft's Xbox 360 were driven mainly by the desire for a Kinect device.

Looking at gaming sales since 2001 (bold denotes a year-over-year decline):

Year

Game Industry ($ billion)

% Change

2011

16.6

-10.66%

2010

$18.58

-5.49%

2009

$19.66

-10.64%

2008

$22

16.71%

2007

$18.85

39.63%

2006

$13.50

17.90%

2005

$11.45

4.09%

2004

$11

-1.79%

2003

$11.20

-4.27%

2002

$11.70

6.36%

2001

$11.00

N/A

(Source: wikia)

Analysis of Data:

The impact of growth of games for smartphone devices and the slow economy might explain the magnitude of the drop in 2011. 2011 sales dropped much like in 2003/2004 and in 2009/10. The drops preceded the release of the next-generation in consoles.

2011 was a good year for Microsoft (NASDAQ:MSFT). Microsoft said that the Xbox 360 was the top selling console for every month in 2011. The company outsold Sony's (NYSE:SNE) Playstation by 2.7M units.

The strategy by Electronic Arts, Take Two (NASDAQ:TTWO), and Activision to sell fewer titles but at higher prices in the $60-range is having an impact on sales.

Conclusion:

Ongoing strength in sales for Microsoft's Xbox and Kinect suggests that Microsoft is still a stock to buy. The growth for subscriptions from Netflix (NASDAQ:NFLX) will support sales for the current consoles, including that of Sony's Playstation and Nintendo's Wii.

Sales for sequels should still be strong, which would benefit Electronic Arts, Take Two and Activision, and EA is the most compelling of the three companies. Shares dropped the most on Jan. 13, down 7.53% and closing at $18.04.

Source: 2 Stocks To Buy After 21% Video Game Sales Drop