Video game sales for Sony Corporation's (NYSE: SNE) Playstation 3, Microsoft Corporation's (NASDAQ: MSFT) Xbox and Nintendo Co.'s Wii have largely been in a downtrend for over a year now. As mobile gaming continues to advance on console gaming, many game developers are switching business models with a stronger emphasis on mobile games for iPads, iPhones, Android, etc.
However, console gaming could soon see a surging return as the "big three" console makers all have new systems in the works. In fact, Nintendo already has its next generation console out on the market, Wii U. To the surprise of many, Nintendo's main problem with the new gaming console is the fact that its supply cannot match the overwhelming demand. Additionally, this supply shortage has made several analysts make the thesis that demand could spill over for the Xbox 720 or even the current Xbox 360. What is the point? Video game developers may be a good long term investment.
One name that comes to mind is Majesco Entertainment Co. (NASDAQ: COOL). Fundamentally, Majesco has a market cap of $38 million and currently has a "hold" rating from analysts. The company has a price to earnings of 11 and a forward price to earnings of 3.37. Valuation wise, Majesco has a PEG of 0.76, price to sales of 0.29, price to book of 1.2, price to cash of 1.4 and price to free cash flow of 5. The small cap game developer has zero debt and is forecasted to see earnings jump 29% next year and 15% the next five years. The stock is down 63% year to date. As you can tell, the stock took a beating this year, giving it a deep value classification.
Other than the undervalued fundamentals, I like Majesco because it is well diversified in the video game industry. The company makes games for consoles (Playstation 3, Xbox 360, Wii, Wii U, DS, DSi) and mobile games for tablets and smartphones. The company is in a perfect position to profit nicely from renewed demand for console games as well as focusing on the future, mobile gaming. One niche Majesco has been going after is the games that feature the new motion technology of Microsoft's Kinect and Sony's Playstation Move. One game in particular that has received much praise and awards is "NBA Baller Beats" which features realistic moves with a real basketball to control the game. Additionally, the company's Zumba Fitness game has been a success and was recently found to actually help lose weight.
The bottom line here is that Majesco Entertainment could be a huge winner as new gaming consoles hit the shelves and renewed demand for console games will increase profits. On the other side of the business, Majesco is further cementing its position as a leader in mobile gaming. The company knows that it can not compete with titles such as Activision's (NASDAQ: ATVI) Call of Duty, so they focus on the motion gaming, which has not seen very many blockbuster titles. Now is the time to take a look at COOL and determine if this stock is right for your portfolio.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COOL over the next 72 hours.