This column was originally published on RealMoney on June 1 at noon EDT. It's being republished as a bonus for TheStreet.com readers.
shocked the gaming industry at this year's Electronic Entertainment Expo when it revealed the $600 price tag of its highly anticipated PlayStation 3 console. The announcement dealt a sharp blow to the prospects for stocks in the beaten-down sector.
There's little doubt that adolescent gamers will have a hard time convincing parents to buy the overpriced units when the holidays roll around. Add that to
botched Xbox 360 introduction and you have gaming companies seriously worried about selling software to their once-loyal customers.
I laid out the challenges facing the gaming industry in
two April columns
. Let's revisit these feast-or-famine stocks to see how they've performed during the broad market selloff.
was the top-performing gaming stock in the first quarter, but as you can see on the chart below, this popular retail operation has had a tough time lately. It gapped down in mid-April and started an uneven correction that is still ongoing. Note how the last selloff dragged the price below the support of the 50-day moving average.
Investors are reluctant to jump back into this stock because game makers are working on technologies that will keep titles from functioning on more than one machine. Because GameStop derives a good part of its income from used-software sales, this security encryption could take them out of a lucrative business segment. But there is good news.
Despite the downturn, the chart has a relatively healthy long-term appearance. Selling volume has been limited, and the pattern still shows a series of higher highs going back to the beginning of 2005. I expect this stock to outperform when the broader market finally stabilizes.
would run into trouble if it broke $50, and indeed, the stock gapped through that support level in early May and dropped into a vertical decline. This happened at the same time that Microsoft finally mass-released its new Xbox 360 consoles.
Many investors assumed the gaming industry would recover when Xbox units flooded retail space, but that hasn't happened. In fact, it now looks like this blue-chip game maker could head even lower. It's also clear that the high price of the new PlayStation 3 console isn't helping things at all.
Take-Two Interactive Software
is more of a cult than a software company. I can tell because of all the hate mail I get when I criticize the company or its stock chart. Now my son also says I'm crazy because he's addicted to Take-Two's popular new title
Elder Scrolls IV: Oblivion
But one sales coup can't turn around an industry in distress. The stock peaked within days of my April columns and dropped into a test of this year's lows near $13.50. This rollover continues a steep decline that began in June 2005, the same time that players discovered hidden sex scenes in
Grand Theft Auto: San Andreas
So what's the moral of this story? The game maker forgot that mom and dad control the purse strings, not the youngsters who thought the pornography was a very cool idea. Just how dumb can a publicly held company get?
chart looked promising in April, but things have changed considerably. Rather than leading the gaming sector into a recovery, it turned tail and played downside catch-up with its peers. Like them, the stock is testing its 2006 lows.
Will these important levels hold and start the uptrend so many industry analysts are expecting? It is June, the month when active speculation about upcoming holiday sales typically starts. There will be multiple platforms and titles to choose from this December, and the industry has already gone through a major shakeout.
But the extraordinary price tag on the Sony console will weigh like an anchor on the industry for the rest of the year. In turn, this could dampen next year's sales and keep customers right where they are now, choosing online role-playing games like
World of Warcraft
and spending their gaming budgets on monthly subscriptions instead of repetitive sequels.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
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