Originally Posted on TheStreet.com on February 21:
Last night, market-research firm NPD released January video-game sales data, with software sales growing 53%, easily surpassing analysts’ forecasts. When factoring out this year’s extra week relative to last January, sales still rose an impressive 22%, representing acceleration from 6% in December.
So who’s winning? Nintendo (NTDOY) is showing phenomenal momentum, with DS hardware sales up 51% year over year and DS software sales up 107%. According to my research, there were not nearly enough DS units to go around during the month, making these numbers all the more impressive. On a personal note, I tried to buy one myself over the weekend, traveling to seven or eight stores around the New York City area. The answer was the same at every one:
“They sell out as soon as we get them.”
In addition, the hard-to-find Wii console sold 436,000 units, outshining the equally supply-constrained Sony (SNE) PlayStation 3 and the readily available Microsoft (MSFT) Xbox 360. Nintendo’s software market share rose 430 basis points year over year to 14.4%, second only to Electronic Arts (ERTS) .
And interesting enough, despite being very supply-constrained on the console side, two Wii titles were among the top-five selling games for the month. Plus, as of the time I’m writing this, 12 of the top-25 selling video-game items at Amazon.com (AMZN) are Nintendo-related.
Nintendo’s surging momentum should have Microsoft thinking about a price cut for the Xbox 360.
However, Microsoft is likely to delay such a move until 2008, after surefire hardware mover Halo 3 hits the streets. A cheaper price point would help Microsoft battle Nintendo for the so-called “casual gamer” that everyone wants a piece of. Plus, a price cut would help the Xbox 360 gain some more share ahead of higher production of the PlayStation 3.
Given Microsoft’s sheer financial heft, the impact of a price cut on the company would be fairly small and thus immaterial in terms of the share price. In addition, Microsoft might actually make the money back quickly in the form of increased software sales. Xbox 360 owners buy a lot of games, and just about every new title of at least decent quality gets healthy preorder activity, an indication of strong pent-up demand for new content.
Looking further into the details, my favored stocks in the group, Activision (ATVI) and THQ (THQI) , continue to beat the pants off Electronic Arts, posting year-over-year gains of 55% and 61%, respectively, vs. a 20% rise for the house that Madden built. Overall, Electronic Arts’ market share fell to 16.7% from 21.2% in the year-ago period.
For Activision, the Guitar Hero 2 juggernaut rages on. It was the second-best-selling game for the month, beating back venerable competitors such as Gears of War for the Xbox 360, despite an $80 price point. I fully expect the Xbox 360 edition of Guitar Hero 2, due for release in early April, to be a blockbuster hit.
Looking at THQ, the company’s WWE Smackdown vs. Raw 2007 did well on multiple platforms, as did Cars. However, the real story with THQ is the one that nobody is talking about, namely yesterday’s release of PC real-time strategy title Supreme Commander, a title so significant, I recently deemed it worthy of an entire article. Supreme Commander has received a great deal of critical acclaim and is already at the top of several sales charts I follow.
As for Electronic Arts, things are getting very interesting there. The company is losing market share, but the January numbers were ahead of what analysts were forecasting. Plus, expectations are very low, and issues such as quality-control problems and rising competition to key franchises are beginning to get priced in. So the stock is good to buy here, provided one is able to stomach the volatility.
In terms of catalysts beyond improving sentiment, a reversal of recent market-share losses would be a primary driver of the stock upward. This could be attained through the company’s efforts to gain more exposure to Nintendo platforms, as well as through the success of key 2007 titles, such as Spore. In addition, the company’s sports titles are ripe grounds for in-game advertising, which is likely to be a significant and high-margin revenue stream over the coming years.
Full disclosure: Activision and THQ are bullish recommendations in the Breakout Stocks newsletter. Given how volatile these stocks are, my ratings are likely to change quite frequently.
Related posts: