These Video Game Suppliers Could Sell-off In The Short Term

CHRIS LAU, KAPITALL: When NPD Group reported that video game sales declined by 25% to $495.2 million, a game reseller company that did not respond negatively was GameStop (GME) . GameStop is in fact ignoring all negative news, and is at highs not seen since September, 2008. [Related:  3 Tech Stocks Reporting Earnings to Watch This Week]

Over a 10-year period, GameStop is outperforming Advanced Micro Devices (AMD) and Sony Corp. (SNE), two companies at the center of the console refresh.

AMD may be rallying in anticipating of Microsoft (MSFT) announcing the chip maker as a supplier, but the overall enthusiasm in game stocks may be short-lived. Once details of the Xbox refresh are revealed, investors may focus back again on the chronic decline in video games.

The highlights of the sales decline are:

·       Hardware sales dropped to $109.5 million, or down 42% from last year

·       Software sales dropped 17% to $254.3 million

·       Total hardware and software game sales, including used, digitally delivered, and rentals was $802 million

Analysis

Investors may be bidding shares up ahead of any news for Microsoft’s Xbox successor. Prior to the Nintendo (NTDOY) release, investors pushed shares as high as almost $18 on October, 2012. Shares then dropped to as low as $11.39 before recovering to $13.90:

Advanced Micro Devices and Sony are beneficiaries for strong investor interest in hardware suppliers. Sony is up 82% in 2013, while AMD is up 70%. AMD sold off recently when Goldman Sachs downgraded shares, and expect “continued disappointing results in the PC segment to mitigate the impact of increased revenue from gaming."

The rally in GameStop is equally puzzling, as weak game sales suggest challenges remain. Shares are up 60% in 2013 and could be moving up as short float is at 33.4%. GameStop is executing well on generating profits from selling used devices. Its loyalty program and strong sales staff helped the company succeed regardless of the transition of game sales from the physical to digital downloads.

In March, the company reported quarterly earnings of $2.16 per share on sales of $3.56 billion. During the conference call at the time, GameStop mentioned that new game consoles from Microsoft and Sony would help GameStop produce strong growth next year and in 2015.

Conclusion

The melt-up in retail game companies and their suppliers appears to be excessive, but investors should not expect them to fall over the longer term. A major refresh in consoles from Microsoft and Sony ensure that the game industry has a platform to compete against mobile games. The positive cycle for GameStop, Sony, and AMD will not begin until later this year, and will unfold over a number of years. For investors who missed the rally, it is probably not a good idea to buy shares at this time. Stocks could sell-off after an Xbox announcement. If that happens, that may be a better entry point for investors.

Written by Chris Lau

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