| Activision
(ATVI) and Other Video Game Makers Look Poised to Rebound Ahead of
New Console Releases |
Published: August 17, 2006
Activision (ATVI) --
Shares of video game publisher Activision have surged +15% over the past
month, helped by a solid quarterly earnings release and concrete signs
of a re-acceleration of growth for the gaming industry.
Specifically, video game sales
are highly dependent on the market for video game systems like
Microsoft's Xbox and Sony's PlayStation. Typically, the
major game console manufacturers will launch a new, updated system every
3 to 5 years; when new systems are launched the game publishers develop
and sell new games designed for those consoles. Clearly, video game
consoles have become progressively more sophisticated, with each new
generation able to handle handle more extensive graphics and more
features.
But the transition period for
consoles can be problematic for video game software developers. Sales of
games tend to slump as consumers wait for new consoles to be launched;
after all, consumers want to buy games with better graphics designed for
the newer systems. In 2005, the industry clearly entered one of these
console transition periods -- consumers slowed their purchases of games,
waiting for three new high-profile systems to be launched. As a result,
game sales dipped into negative territory starting in the middle of last
year and stretching into the first few months of 2006.
But that cycle is now turning.
Microsoft's newest console, the Xbox 360, launched at the end of 2005
and the company simply wasn't able to meet demand -- sales lagged
expectations throughout the 2005 holiday season because Microsoft could
not obtain sufficient parts to build the consoles. In fact, it was well
into 2006 before Microsoft could clear up parts shortages and begin
satisfying demand for the system.
Strong demand and sales for the
Xbox 360 is now filtering through into demand for video games based on
the console -- Activision reported impressive sales of its Xbox 360
titles in the most recent quarter. The company is behind Call of Duty
2, the single best-selling Xbox 360 game on the market today.
Looking out to this holiday
season, there are two new consoles scheduled for launch -- the Nintendo
Wii and the Sony PlayStation 3 consoles are due to be
released this November. In particular, the PlayStation 3's launch should
be a major catalyst for video game publishers. The PlayStation 2, Sony's
current console, enjoys a 34% share of the gaming console market -- a
higher share than Microsoft's Xbox 360 and older Xbox consoles combined.
Sales of Sony's popular system are expected to be even more robust than
for the Xbox 360 last year.
Activision has some of the most
popular gaming titles on current Nintendo and PlayStation consoles.
Therefore, the company will likely be able to grab significant share of
the new console market too.
Meanwhile, the gaming market
overall continues to grow, benefiting not only Activision, but also
industry leader Electronic Arts (ERTS). The first generation of video
gamers is now entering their late 20's and early 30's with more
disposable income to buy games. And China, India and other developing
markets represent another source of growth for the industry.
Perhaps even more importantly,
the industry is opening up new revenue sources. Chief among those is
advertising -- major companies actually pay software-makers to place
their product promotions inside games. These advertisements are popular
because games sell well with the 18 to 34 year old crowd -- a key
demographic group for most advertisers. Although in-game advertising is
a small market today, it's poised to grow notably in the coming years.
With these points in mind, shares of both Activision and Electronic Arts
remain solid buys at today's levels.
Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
