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The Surprising Winner of the Videogame Wars

2 | By Michael A. Robinson

Every year, it’s one of the most-talked about products of the holiday shopping season.

During product-rollout years – that is, when new models are appearing – the sales growth is explosive … and the marketing buzz addicting.

This holiday season – thanks to two product rollouts in November – will be one of the hottest in memory for this sexy slice of the high-tech business.

With a backdrop as hot as this one, folks who identify the eventual winner stand to pull down a hefty profit.

And in today’s Strategic Tech Investor, we’re going to show you who we believe the winner is going to be.

Playing Games

If you haven’t already guessed, we’re talking about the videogame sector.

Because it gets so hot during the holiday shopping season, folks tend to think of gaming as a consumer product. But it’s actually one of the backbones of the high-tech sector, driving development of semiconductors, displays, software, sensors, controllers and other key elements of technology devices.

And this year is shaping up to be special.

Consider that the respected market researcher Gartner says the global video market will hit $93 billion this year, up nearly 18% from the $79 billion last year.

And there’s still more growth ahead: Gartner is forecasting another 19% increase by 2015 when the sector will reach $111 billion in sales. That works out to a four-year sales gain of 40%.

Those figures include sales of mobile and PC games, software titles and video consoles. This last category still ranks as the largest segment of the market with projected 2013 sales of $44.3 billion – or roughly half the entire industry.

Before we can tell you about the one stock that will put the biggest punch into your portfolio, we need to tell you about the three console makers … identifying the winners and losers.

We’ll take them one at a time …

Nintendo Looks to the Past

When the first-generation Wii gaming device from Nintendo Co. Ltd. (OTC: NTDOY) debuted for the holiday season in 2006, it was a true game-changer. I know this from personal experience: My wife was one of the first people in the U.S. to try it out.

To appeal to a mainstream audience, Nintendo made a brilliant marketing move. It invited moms to live demonstration parties and pitched it as a game console that would bring the family together.

My wife and her friends went to one of the parties. Several bought the breakthrough game – our family included.

The original Wii was such a huge hit because it gave consumers their first real look at the cool things that were made possible by motion-sensor technology. The sensors embedded in the Wii’s hand-held remotes allowed users to play tennis, baseball, golf and more in a highly realistic manner.

Industry analysts still rank the Wii as one of the more successful game platforms in recent history. Nintendo says to date it has sold more than 100 million of the original Wiis.

Unfortunately for Nintendo, its follow-up offering – the year-old Wii U – isn’t doing anywhere near as well.

And sales coming into this year’s holiday-shopping sales to date actually stink: Nintendo originally forecast sales of 5.5 million consoles in the fiscal year ending March 31, 2013, but missed by more than 35% with sales of 3.45 million units.

No doubt, the game suffers from a lack of simplicity. The U includes a tablet-like controller that some consumers found confusing to use after the elegant simplicity of the original Wii.
Back in June, Nintendo CEO Satoru Iwata told CNBC the dismal launch was due to a lack of good software titles for the device, admitting that “we are to blame.”

Nintendo is trying to become more competitive this Christmas by releasing more than a dozen new game titles. It’s also hoping that the buzz the industry is getting during the holiday shopping season could also spell increased sales for the Wii U.

And given the sold-out status of the next two consoles, a rebound is entirely possible …

Sony’s Bidding Frenzy

You know you have a breakout hit on your hands when the gaming console’s release is so eagerly awaited that eBayers are putting up pre-rollout bids that are 60% higher than the manufacturer’s suggested retail price (MSRP).

That’s precisely the reception that Sony Corp. (NYSE ADR: SNE) had hoped for – and got – with the Nov. 15 launch of the PlayStation 4.

Then again, this was the first new PlayStation release in seven years – an eternity in the fast-paced gaming world. The eBay bidding frenzy before the official release of the $399 device underscores a dynamic that most investors may not understand.

Turns out, the belief that video games are largely for teenage boys is a myth. The Entertainment Software Association – the trade group that oversees that slice of the gaming business – says the average age of a gamer is 35. One fourth of all gamers are over age 50, the group says.

With that kind of discretionary buying power, gamers made the PS4, as it is often called, an instant hit.

Sony says it sold 1 million PS4s in the first 24 hours they were available here in North America. That was five times the 200,000 PS3s that Sony sold on its opening sales day back in 2006.

And that was just the start.

At the end of the game’s first week of sales, electronics retailer Best Buy Co. Inc. (NYSE: BBY) revealed that its entire supply of PS4s was almost gone.

To impress hard-core gamers, Sony upgraded the new console with faster speeds, better memory, and dazzling graphics. Sony also released the PS4 alongside nearly two dozen gaming titles.

Sony says it expect to sell some 3 million PS4s worldwide by the end of the year. But those figures won’t include sales in its native Japan, where Sony won’t begin selling the device until late February.

As the pre-introduction bidding hinted – and the opening week sales landslide confirmed – Sony has a hit on its hands.

And it’s not alone …

Mr. Softy Flashes Muscle

Not to be outdone in the gaming wars, Microsoft Corp. (NasdaqGS: MSFT) announced a first-day record with 1 million new Xbox Ones sold in the first 24 hours of its availability.

No doubt some observers will say that Microsoft benefited from its broader global reach. The Xbox One was available in a total of 13 countries, while the PS4 was only introduced in North America.

But consider this: The first new Xbox in eight years basically sold out in its first day on the market. Fact is, Xbox One units were unavailable at both retail stores and online.

So, there’s no telling just how many units Microsoft could have sold had it increased production before the official launch.

That’s quite an accomplishment when you consider that Microsoft’s new game console retails for $499 – $100 more than Sony’s PS4.

With its new Xbox, Microsoft is offering some key features that appeal to hard-core gamers and mainstream buyers alike. Of course, it also benefits from an update to the Xbox’s Kinect motion-and-voice-sensor that makes it easier to operate for the average user.

More to the point, Xbox One is central to Microsoft’s vision of playing a bigger role in home entertainment. This updated version easily integrates with online video streaming from Netflix and Hulu.

And the Microsoft-owned Skype video calling service works with Kinect to allow facial recognition and automatic log-ins.

As I see it, there’s more at stake here for Microsoft than just coming up with a smash video-game success.

It shows that, despite its size and conservative approach, Microsoft can still muster a creative edge needed in today’s fast-moving tech world.

Thus, Xbox One is a good catalyst for Microsoft at a critical time in the company’s history.

And that makes Microsoft the one gaming stock you have to own – a potential big-gainer with limited downside risk.

Here’s why …

CEO Steve Ballmer has announced his retirement in the next few months, and the company is searching for a new leader deeply experienced in corporate restructuring.

That gives us two catalysts back-to-back that should spark a surge in Microsoft’s stock, which already offers investors a heck of lot of value for just $37 a share.

Last year, Microsoft generated nearly $19 billion in free cash flow (FCF). With a market cap of $313 billion, the company’s shares trade at less than 13 times forward earnings. That’s a 30% discount from the Standard & Poor’s 500 Index’s forward Price/Earnings (P/E) ratio of 18.5.

Microsoft is one of those great “foundational plays” we’ve talked about in the past.

And with a stock like this you can win the one “financial game” that really matters – greatly improving your net worth.

[Editor’s Note:] For the last year I’ve been doing extensive research on one of the most fascinating – and possibly lucrative – investment opportunities I’ve ever seen. The technology behind it is incredible. Unfortunately, the mainstream media is keeping the American people in the dark about this. That’s why I did my own investigation.
Now, what I’m going to show you is controversial and not for everyone. But I wanted to share my findings with you first. Click here to continue…

2 Responses to The Surprising Winner of the Videogame Wars

  1. Kenneth Hurley says:

    I will make another prediction. Neither we be successful. I’ve been in the video game industry for 30 years and have been pretty spot on with my predictions.

    The reason? Microsoft and Sony are basically building commodity PC’s and calling them gaming boxes. The retail market is steadily declining for high priced video games >$60.00. Digital and streaming video games that are affordable and fun with the necessity to be distributed through old-school retail channels will dominate in the next 2-3 years. The demographics for these games is 18-35 year old males. The males have been steadily been conditioned to pay .99 cents for quick and fun games. My children barely use console products. They only use them when a really good game comes out like the Disney Infinity Game.

    Just as MP3 killed off the music CD industry, so will digital games kill off retail CD/DVD games.

    Other reasons for the demise of the retail channel include the cost to make AAA games for consoles and the dependence on “a hits driven” business. Long-tail business decisions are much more effective and profitable.

    The final nail in the coffin is the used game market perpetrated by GameStop. When they don’t share in their profits from this, game developers/publishers invent new ways to prevent the resale of used video games, i.e. online content, toy figures, etc.

    Even with 5 million consoles out there, you have to sell 2 million units of a game minimum these days to make a profit. It’s very nearly impossible to do that. Only a few make it.

    If you do the math it even looks worse. A $59.99 game will wholesale for about 70%, so a gross profit of about $42.00. Pay Microsoft/Sony their royalty and cost of goods for a total of about $15.00 and now your net profit is $27.00 with development costs approaching $10-20 million to make a game you break even at 750,000 units (15% market penetration). This doesn’t even take into account the retailers always marking-down the product when it’s not meeting it’s sales quotas and popping you for marketing costs.

    The numbers get even worse for $39.99, $29.99 and $19.99 games at retail.

    My prediction that streaming games, just like streaming videos, will replace and dominate the retail CD/DVD Market.

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