Nintendo, Activision: Go for the Growing Game Cycle

Take-Two's (TTWO) success with Grand Theft Auto 4 was and is simply breathtaking. The game made over $500 million in its first week. To put that in perspective, the Spider-Man movie, over its lifetime in US box office sales, adjusted for inflation, made $479 million. So in one week, GTA4 surpassed the entire take of Spider-Man, one of the most successful movies of all time. Think about it. In case you're wondering, yes, I've played GTA4 (thanks again for the gift, lovely and video-game enabling wife!). Yes, it's fun. Yes, it's for adults, but you've seen much worse on TV or at the movies. Double standards are a fact, I accept that, but someday we will probably think of GTA4 the same way we think of Elvis' hip movements. Everyone calm down.

GTA4, however, is probably overshadowing the real story in video games, which continues to be Nintendo (NTDOY.PK). Video game tracking website VGChartz.com recently reported that the Nintendo Wii set non-holiday sales records in the Americas in April. The only thing holding back the Wii has been supply, and that seems to be improving. Furthermore, no one talks about the DS--Nintendo has only sold 70 million of those. If you go to Amazon.com's list of bestselling video game gear (updated hourly), you would find that right now GTA4 is not topping the list. It's Mario Kart. In 2nd place is the Wii, 4th is the Wii Wheel (needed to play Mario Kart), and 6th is the pre-order for Wii Fit. Nintendo holds 16 of the top 25 selling items. NTDOY pulled back during the market turmoil, in part because of a stronger yen, and trades around $70 currently. The 52-week high is 78.50. It will get back there, so I'm buying this one on the dips.

The other company to keep an eye on is Activision (ATVI). They just reported another great quarter, so what else is new? The interesting development here is that ATVI is trading well above its tender offer price of 27.50. The stock has been hovering around that level for a while, presumably because it was a sure thing as long as the Vivendi deal closed. In my uninformed mind, the jump to the 29 level is a signal that the Street is no longer simply seeing ATVI as a merger play, but as a future growth story that more than justifies a share price in the high 20s. With Guitar Hero going to the DS, a James Bond game coming out (Bond is cool again), sequels to solid franchises on the way, and the addition of Blizzard (World of Warcraft, et al.), Activision should only build on its success. Any pullback under 28 is a buy in my book.

The economy is weak and the market is sketchy, but I think you can use weakness to add to video game positions. I've mentioned this in a previous post, but it's worth repeating: a growing video game cycle can overcome even the worst market. Below is a 2-year chart of ATVI compared with the Nasdaq, covering the period from October 2000 to October 2002.

As you can see, the Naz was down over 50% during that time, but ATVI was up, at one point, over 250%. The video game cycle, especially in the software space, will roll until new consoles are announced, and I've seen no indication of an Xbox 720 (MSFT). Why call a bottom in financials or a top in oil when you can own a sector like this?

Disclosure: I'm long ATVI and NTDOY

Comments

[T2Irepper]

There you go again, citing vgchartz. Don't you realize just how hard it is to take you seriously when you source that garbage site?

[thestocksurfer]

VGChartz isn't perfect, but neither is NPD. I look at a wide variety of sites to get an overview of the games that are doing well. The point is, VGChartz has consistently shown Nintendo's strength, and so far they've been spot on. What are your sources?