Gamers Won’t Stop: Bullish Growth in Video Games Continues
August 28, 2007 5:15 pm SmartGuyDH CommentsLast 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
August 28th, 2007 at 7:27 pm
I agree on all your points except for Majesco. They are turning things around, and are hitching their wagons to NTDOY, which i believe will prove to be an extraordinarily winning move. There are problems, yes…but there is reasonable speculative cause there.
August 29th, 2007 at 7:46 am
Ah come on! Don’t hold back tell me how you really feel about those companies. Its refreshing to hear a real opinion! Thanks!! But be careful. Its easy to get sued……..
August 29th, 2007 at 10:10 am
I agree with much of what you write. TTWO is speculative but I have a feeling they have a gem in BioShock. The market over reacted with the delay of Grand Theft Auto. If BioShock makes the top ten selling game for September then TTWO will surely go up. GME and NTDOY.PK are the cream of the crop. You are on the spot.
August 29th, 2007 at 11:31 am
Thanks for the comments. I welcome as much dialogue as possible about all the stocks and industries we are covering. I want us all to make money together. Otherwise, what’s the point?
I agree that COOL is trying to turn around via the Nintendo DS and Wii. I would consider this an excellent strategy, except they have a track record for promising turn arounds and then flopping. Excellent management is the single best characteristic of a superior investment. That’s why the top private equity and venture capital firms only invest in proven executives. I am open minded about any company in this fast growing industry, but buyer beware.
At the end of the day, every company in the industry has some level of potential, but my goal is to get our readers invested in the best companies with above average risk-reward ratios. That way we can all sleep at night and weather any storms that may fall on the broader market.
Best,
SmartGuyDH
August 29th, 2007 at 1:39 pm
Majesco Earnings are on Tuesday, September 11th…Let’s hope that date is not a bad omen.
I’m of the opinion that any publisher putting out at least decent Wii games should do well in the near term, because there simply aren’t enough of them on the market to satisfy the current install base. EA only has a handful of Wii games on the market. I think earnings will reflect that this move was wise, and is working.
I do agree with you about management being critical…and my history as a Majesco investor is admittedly brief…but perhaps this strategic shift is evidence that even a blind squirrel can get a nut from time to time.
August 29th, 2007 at 1:58 pm
Gazerk,
I agree with your insight about the lack of games for Wii. I have a Wii and the game aisle is not as large as my desires. Thus, I think you are correct that COOL may be able to grab some low hanging fruit from the current conditions. But it’s a guess for me. If you have some insightful analysis, please feel free to post in your comments. Interaction is encouraged!
Let me know what you think about the conference call on 9/11.
Best,
SmartGuyDH
August 29th, 2007 at 5:04 pm
SmartGuyDH,
You’ll have to forgive the longwindedness of this post…succinct, I am not. But I think there’s a case to be made for Majesco.
I can’t claim any true insights - nothing that would make me any more qualified on paper than anyone else. I’m more of a trend spotter who has done well using a wholly unscientific methodology (i won’t claim it to be anything more). I look for consumer trends, and buy the companies that I think will benefit from them.
As an example – I poured my savings into AAPL in 2003 when i realized that I kept seeing people walking by with white earbuds…everywhere; that includes cities and rural areas – the ipod had suddenly become ubiquitous, but the stock price didn’t seem to reflect it, and analysts were predicting relatively small numbers. In other words, the street’s faith in AAPL didn’t correspond with what I was seeing on the actual street. The following 6 or so quarterly reports proved me right, and I cashed out (not for lack of belief in the company, but to put a down payment on a house).
I had a windfall in mid 2006, and instantly put the bulk of it into NTDOY, which was the first time I had purchased an ADR (not as difficult as I thought it might be…you buy it just like you would a normal American-listed stock). It’s up over 100%, and I still think it’s undervalued. What everyone forgets about Nintendo, is that they own the IP for all their best selling games. They make more money per game than any other publisher. While everyone focuses on which console is winning the war, they fail to give credence to the volume of software that’s being sold.
You hear all the big publishers now publicly announcing their “Nintendo Strategy.” That’s because investors want to know how these companies are adjusting to the runaway success of the Wii (and seriously, do not forget the DS). The wake caused by the sweeping adoption of the Wii/DS platforms won’t cause the aircraft carrier sized publishers’ stock prices to move all that much…but it should do wonders for the speed boats.
So…for me, COOL is a speculative play – they are that speed boat in the wake. At the current prices, i don’t see much downside (their cheaply made games are selling, and there is a drought of wii titles on the market), but I do see upside…whether that be from Wii/DS sales, or from the remote possibility that a larger publisher (one without a sound Nintendo strategy) would want to buy them.
In the short time i’ve been watching COOL from an investment perspective, i’ve seen the stock swing from $1.80, down to $1.45, up to $2.50, back down to $1.65, and now up to $2 or so (all numbers obviously rounded off). It moves hard and fast, largely because of the low volume – so if the downside is limited, and there is at least a speculative upside…the upcoming earnings (if positive, as I expect) should dramatically send Majesco stock upward as new investors clamor for what little stock is out there to own.
But again…I’m basing all this on very unscientific reasoning. They may report horrible earnings, and reveal the folly of my ways. Place your bets.