Video Game Sectors Remaining Bright Spots

November was not a great month for video game sales according to an industry research firm NPD. Overall sales dropped 7.6% from a year ago to $2.7 billion in the month, which is certainly a disappointment considering the month included the most successful game launch of all time in “Call of Duty: Modern Warfare 2″. The blockbuster launch of Call of Duty strengthened software sales as they slid only 3.1% but still missed analysts’ expectations. That being said, software sales were robust compared to console or hardware sales which dropped by 13% in the month. Console makers have lowered prices significantly in the last year to help entice buyers to take the plunge into the newest generation of hardware. Nintendo’s Wii is the cheapest and still best selling console, edging out competitors Microsoft (MSFT) and Sony (SNE).

The industry group said that there is still a chance that the industry reaches the $20 billion threshold for the full year, but it would take a robust December in which sales would have to be 11% better than a year ago. Considering how much weaker sales were in November than a year ago and the relatively subdue raise in holiday retail sales from last year, this sounds like wishful thinking. This is an industry facing a lot of challenges as we pointed out following last week’s disastrous quarterly report from popular game maker Take-Two Interactive (TTWO) (Take-Two’s Bad Quarter Causes Investors to Double Take).

With the difficulties in mind, we continue to believe that there are a few stocks that have attractive value in the sector. We have been written in the past few months that we believe GameStop (GME) is attractively priced. Competition from other bricks and mortar retailers as well as from the emergence of digital downloads have many traders bearish on GME. Coming into Friday, the stock was trading at just over 8 times this year’s earnings and 7 times next year’s expected earnings! Furthermore, the company released word today that in spite of the industry’s difficult monthly sales, new games sold 15% better than a year ago and continued to grab market share. Not surprisingly, we have an Undervalued stance on GME for long term investors looking to play a rebound in video games.

For one other bright spot, we also have an Undervalued stance on Activision Blizzard (ATVI) the market of “Call of Duty: Modern Warfare 2″. While its valuations is not as attractive as is GME’s, it still has potential to rise in the next few months as the sales numbers are reported at the quarter’s end. Much has been made about how sales in the first week of Call of Duty were greater than any other major media release in the United States including blockbuster movies. The stock is actually down nearly 5% since that blow-out numbers, which seem to have been brushed off by the market. We think that the current fundamentals would support a price of $12 per share without even factoring in the bump from Call of Duty.

As November sales totals demonstrate, these are difficult times for the video game industry as a whole. However, value seeking investors could do worse than picking some unloved players in this market that continue to perform adequately through the challenges.

Video Game Sectors Remaining Bright Spots

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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