Social media and mobile device gaming is in the limelight. Zynga (ZNGA) and Facebook (FB) trade at very high valuations while traditional console gaming stocks are trading at much lower price multiples. Regardless of the phenomenon of a new social/mobile gaming world, traditional console gaming is alive and well. Many of these stocks are priced to reward investors in the long-term.
Better yet, investors might only have to wait until Christmas to open their presents. A new PS3 and the long-awaited new version of the Nintendo (NTDOF.PK) Wii have been launched in time for the holidays. These holiday releases may be catalysts which attract investor interest back to these companies.
A New PS3
Sony (SNE) new PS3 consoles sell for $249, have more memory, and are tinier and lighter than older models. The release of the new PS3 comes during a regime change at Sony. Kazu Hirai became the chief executive officer this April and plans to cut nearly 10,000 jobs in light of multiple years of consecutive losses. Sony will be highly motivated to work with game developers to help promote the platform.
The Wii U Launch
The Nintendo's latest Wii U video game console is selling out even though units won't ship until November. Pre-orders for the console have started catching speed as retailers declared that they are "sold out" already. Nintendo's shortage of consoles could mean that the Wii U will be a huge hit just like its predecessor.
However, the shortage might also mask a tepid demand. There is no way to know what sales could have been achieved with an excess inventory.
Many analysts believe that Nintendo is using limited supplies to create buzz. Constraining inventories and initial sales may be justified since, thus far, the new gaming console has failed to inspire the widespread excitement of the original.
Game Stock Valuations
GameStop (GME), however, is likely to notice increased foot traffic and game sales. Software developers who publish games for these systems will also feel a lift.
Consider the following stocks which will be impacted the most by the introduction of these new gaming systems:
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Notice how many of these console stocks are very cheap. Fortunately for value-conscious investors, these stocks are not as glamorous and are trading at low valuations. The price-to-book values for Konami and Electronic Arts are below the average for the S&P 500 index, even though they have significant off-balance sheet intellectual property. Such intellectual property can include brands, copyrighted materials like fictional characters, and patented technology.
Konami and Activision Blizzard are also trading at attractive price-to-free cash flow multiples. A similar observation can be made for the price to sales ratio, which is very low for Konami and Electronic Arts.
Plain and simple, these stocks are cheap because they are out of favor. There is a prevailing belief that gaming is moving to social media and mobile devices to the detriment of console-based gaming.
Higher valuations can be found in those hotter areas. Facebook has the highest price-to-earnings ratio on this list and Zynga's PE ratio cannot be calculated because it runs a loss. The same can be said of the price-to-free cash flow ratios of these stocks.
Holiday console gaming sales could significantly lift the operations of these pre-social, pre-mobile gaming stocks. It might also focus market attention on these stocks and expand their price multiples. Both of these effects would benefit shareholders.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.