Video Game Companies Extend Bullish Trend

by: Smart Guy Stocks

Last week, the only pure play video game retailer - GameStop Corp. (NYSE: GME) - reported excellent earnings. In short, net profit increased 650% yoy to $21.8 million ($0.13/share) and beat estimates by $.04/share. Revenue was $1.34 billion, 12.6% higher than average analyst estimates of $1.19 billion. Same store sales increased 29%. GameStop also raised full-year guidance to between $1.45 and $1.48 (up from $1.42 to $1.46).

I am writing about GameStop because it is a bellwether for the video game industry. When the bells start ringing like they are, we know the flock will start following the leader. However, not all video game stocks are as sure a bet as the overall growth of the industry. In order to best understand the landscape and place some winning bets, we must first look at each component of the video game industry.

Console Manufacturers: A console is a device that reads a game and translates it to a usable experience (much like a hard drive for a computer). Three companies currently manufacture consoles: Nintendo (OTC: NTDOY.PK), Microsoft (NasdaqGS: MSFT), and Sony (NYSE: SNE). Of the three, only NTDOY has the ability to meaningfully reflect console sales in the share price. The other two are some of the largest companies on the face of the Earth, and an investment in them is an investment in more goods and services than I care to follow.

Video Game Publishers: Video game publishers make the games. The most visible publishers are Activision (NasdaqGS: ATVI), Electronic Arts (NasdaqGS: ERTS), THQ (NasdaqGS: THQI), Take Two (NasdaqGS: TTWO), Atari (NasdaqGM: ATAR), and Majesco (NasdaqCM: COOL). First, let me toss the garbage into the discard pile. If you are interested in gambling and throwing your money on the longest shots at a race track, here are a couple to waste time with: COOL and ATAR.

COOL is one of the worst run companies I have ever followed. This company is why Warren Buffet recommends, “It’s better to own a significant portion of the Hope diamond than 100 percent of a rhinestone.” The company has a lot of nepotism scattered through its ranks, and these people have less than a handful of brain cells between them. The company has been wrought with problems for years, and the climax was two years ago when the company’s then CEO Carl Yankowski pre-announced excellent earnings a few weeks before stunning shareholders with a massive miss (in laymen’s terms we call that “lying” and “misrepresentation”). If you bought a few months ago you could’ve made 50% on your money – but that’s only worth it if you enjoy staying awake at night wondering if the company will exist tomorrow.

ATAR is another fallen star. After years of nothing, this once famous company staged a major branding campaign to get back in the game. However, the company is poorly managed, its games are subpar, and if you invested, you would’ve watched shares nosedive from $60 to less than $2. Another piece of garbage for the renewable energy industry.

The next tier – one step from garbage – has only one member: TTWO. The company has been bought by a private equity fund that seems to be doing all the right things: slashing jobs, streamlining spending, and basically restructuring the entire company. TTWO has some excellent assets, franchises (including the famous Grand Theft Auto), and a nice balance sheet; however, the company has a long history of corrupt executives that cheat shareholders. The company recently announced a new game BioShock that is receiving top kudos from gaming experts and magazines, but some say it is too complicated to sell strong beyond the extreme gamer audience (i.e., the mainstream may not buy in). If you have the time to watch this stock like a pedophile at a kindergarten orientation, then you may be able to squeeze out some nice returns – otherwise, you may be better off upping your ante on your NFL Fantasy Football pool.

Stay tuned for my next installment where will I cover the best of breed game makers and continue to show why GME and NTDOY are currently the best bets in the video game industry.

Disclosure: SmartGuyDH is long NTDOY.PK

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