Nintendo Should Watch Its Back

by: Wall Street Strategies

By: Brian Sozzi, Equity Research Analyst

One could see it in the newspapers, specific news sites, or online in general, a lack of negative news on the economic front. For the last few sessions, the sense has been that we know what we know, and that impending shocks may not happen. That has established the platform for equities to gain ground, bouncing from conditions that continue to be described as oversold. Valuations on stocks were outright attractive to start last week, though at the time nobody knew if those valuations could become cheaper given the unknown ducks that were far down the river bend. However, with earnings season (believe it or not) only a few weeks away, seeing profit growth by companies, global companies no less, will be welcome. Perhaps what we are experiencing at the moment is the pricing in of slightly better than expected second quarter earnings and reiterated guidance. After all, comments by companies that reported first quarter earnings in early June suggest demand trends in most pivotal international markets remains solid.

My, How Things Change Over the Years

At the young age of eight, yours truly was gifted his first entry into the world of videogames. Mom and dad scrimped and saved for the year and to my sheer joy, I unwrapped a Nintendo (or NES) that included the rare power pad attachment. For those unfamiliar with either product, Nintendo (OTCPK:NTDOY), in my view, established the platform for video gaming as we think about it today. Sure, there was Atari and then the Commodore 64, but the fact is the games were only such in title only. Bite-sized stick figures moving up and down on the screen, again in my opinion, was not a seminal videogame experience. As for the power pad, it allowed a young eight year old, like myself, to pretend he was in the Olympics, jumping over virtual on screen hurdles and running past the character my brother was using in his attempt to destroy his older sibling (I will never admit to him beating me in anything!)

Fast forward to today, and I find myself becoming rather nostalgic. The videogame industry's annual gaming conference, known to gamers as E3 (I do not play that much anymore, books and life have caught up to me), began yesterday evening with the final announcement of two new motion sensor controllers by Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE). Although each product is short of being a major innovative idea (Nintendo Wii was first with its motion sensor controller), I think it will help to spur console sales for the holidays. These motion sensor controllers are being married to very powerful game consoles, consoles in which the manufacturer has dropped the price in the last year. Basically, Nintendo is, and I am constraining my language here, in much trouble by having an inferior product on the market. Key rivals have caught up, so Nintendo should watch its back; it will take more than a new 3D handheld devices to quell concerns in the marketplace about the company's medium-term financial outlook.

Speaking of 3D, game developers are also planning to unveil a host of games to support the next evolution in viewing experience. I truly have mixed emotions about 3D gaming, it seems akin to overkill and something that may cause motion sickness on a very gruesome first person shooter (think soldiers popping into your living room when playing Call of Duty). I also have reservations about game publishers shelling out millions and millions of dollars to support 3D content with no definitive indication the demand will meet the investment required. If you are attracted to the game sector as a potential investment, I would urge hesitance. Over the next 3-4 years, game publishers are likely to be investing to support new consoles and new technologies. While this is unfolding, the traditional packaged goods industry will be under further attack from free to play games sprouting up on Facebook and Apple's (NASDAQ:AAPL) app store. Mixed demand trends and rising costs, in the world of investing that is an unwelcome combination. It would make Benjamin Graham, king of value investing, roll over in his grave.

That said, isn't it truly amazing where technology has brought us today? From once enjoying stick figures dancing on a television screen to having virtual soldiers in your face while sitting on the couch holding a motion sensor controller, times are sure changing. Not sure if it's for the better though. I happen to believe children with cell phones are destroying their creative engines, in many respects this applies to adults. Different discussion for a different day, however.

Disclosure: None