Video game console makers Sony (SNE) and Microsoft (MSFT) have been hoping that 2010 turns out to be a better year for video games than the last. And after a disappointing January report, the February numbers that will be released in the next week or so are going to be an important indicator. Software stocks like Activision Blizzard (ATVI), Take Two Interactive (TTWO), Electronic Arts (ERTS) are biting their nails in anticipation.
After a 2009 dominated by lower year-over-year monthly sales figures, the video game industry turned things around in a huge way just in time for the holidays, recording its best month ever — with $5.53 billion in December sales, up 4% from the already impressive totals of December 2008. Unfortunately, gamers overcompensated by tightening their belts in January and prompting a 13% decline according to entertainment industry polling firm NPD group. That huge swing means a lot is riding on the February numbers that will be released in March.
There aren’t a lot of reasons to be optimistic, however. Leading the way in December’s breakout month of sales was hardware, which saw 16% growth over the year before, and it appears that major console players are already banking on a big Christmas season in 2010 by pushing back their hardware releases into the fall and winter of the year. For instance, Sony (SNE) is getting a lot of buzz in anticipation of its motion controller meant to compete directly with the technology of Nintendo (NTDOY) and its Wii remote. But in January, the spring release date was pushed back until fall. Microsoft (MSFT) has been talking about a Christmas release date for a while for its Project Natal wireless gaming technology — and frankly, that’s the absolute latest the company can afford to launch the device.
With no new gadgets, that leaves the industry at the mercy of game sales alone.
Electronic Arts (ERTS) should do alright thanks to the highly anticipated sequel to its Mass Effect game, released at the end of January and moving half a million units in 24 hours. The new gory adventure game Dante’s Inferno also could be a great new source of revenue.
Take Two (TTWO) could have pulled in a nice performance in February with its sequel to the critically acclaimed Bio Shock title. The first title has sold more than 3 million copies worldwide. Shares of Take-Two are showing strength lately after the video game publisher posted strong first-quarter results and a profit forecast above expectations, so there’s reason to expect the Bio Shock launch and sales of existing titles remained strong in February.
Activision Blizzard (ATVI), on the other hand, doesn’t have a lot to add to the mix. Still, its existing suite of titles seems strong. The company posted a loss at the beginning of February with its latest quarterly report, but adjusted results topped Wall Street’s expectations on strong sales of Call of Duty: Modern Warfare 2. The company has ridden this military strategy franchise to profits in recent months, along with its Guitar Hero and World of Warcraft franchises. But there are no guarantees these titles will continue to resonate with consumers for much longer, so shareholders better hope ATVI has some good titles in development to keep sales flowing.
If consumer spending remains weak, the video game industry may continue to go light on product development and bank on another big splash over the holidays. The February numbers we see in March could be a good sign of whether the industry is getting back into growth mode or still staying lean as it waits for the next round of holiday sales.
It’s a long way until December, so shareholders of these software stocks better hope that video game sales numbers improve — and console makers MSFT and SNE better be prepared to make their money elsewhere in the interim.
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