DEEP ANALYSIS: Video Game Sales Outlook

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

We expect August U.S. retail video game console software sales data to be released by the NPD Group after the market close on Thursday, September 6.

We expect console software sales of $240 million, down 8% vs. last year’s $262 million despite an easy comparison of down 35% due to continued industry weakness.  The current console cycle, currently in its unprecedented eighth year, is generating fatigue among gamers, with little new IP, mass migration to free online multiplayer gaming, and continued market share losses for the handhelds and Nintendo (TYO:7976) Wii. We expect console software sales weakness to continue until later this year, when the quality of releases improves and Nintendo’s Wii U debuts. Wii U could potentially reinvigorate gamers, depending on pricing, performance, and third-party support, all of which should be addressed at Nintendo’s Wii U Preview in New York City on September 13. We expect Microsoft and Sony to implement hardware price cuts prior to the Wii U launch.

Exhibit 1: Estimated Console Software Sales

By publisher ($ millions)                                                                                   YoY                                  MoM

Aug-12E            % change                        % change

Activision Blizzard (NASDAQ:ATVI)                                $35                        6%                                      4%

Electronic Arts (NASDAQ:EA)                                              $37                       -9%                                 -39%

Majesco (NASDAQ:COOL)                                                            $3                        -35%                                   -3%

Nintendo                                                                                            $45                          32%                                 39%

Take Two Interactive (NASDAQ:TTWO)                        $16                            -1%                               -27%

THQ (NASDAQ:THQI)                                                                  $24                           78%                              203%

Ubisoft Entertainment (EPA:UBI)                                    $12                           -36%                               -19%

Covered Publishers                                                                   $172                              7%                                  -1%

Overall Industry                                                                         $240                             -8%                                 -8%

Publishers as % of Market                                                         72%

Source: The NPD Group/Retail Track and Wedbush Securities estimates.

We expect August console software sales to be led by new releases Activision Blizzard’s Transformers: Fall of Cybertron (360, PS3, PC), Nintendo’s New Super Mario Bros. 2 (3DS), Square Enix’s Sleeping Dogs (360, PS3, PC), and THQ’s  Darksiders II (360, PS3, PC), and July release Electronic Arts’  NCAA Football 13 (360, PS3). We note that for a second consecutive year EA’s Madden NFL game was released after the August retail close and will be captured instead in the September data.

We expect hardware sales of 65,000 Wii units (down  66% year-over-year), 215,000 Xbox 360 units (down 30% y-o-y), 160,000 PS3 units (down 26% y-o-y), 105,000 DS units (down 37% y-o-y), 155,000 3DS units (down 35% y-o-y), and 50,000 PS Vita units.  In July, unit sales were down y-o-y for every platform except the 3DS for an eighth consecutive month, notwithstanding price cuts for nearly all models over the last year or so. PS3 and Xbox 360 unit sales were down 4% and 26%, respectively, while Wii sales were down 63% and under 100,000 units for the fourth consecutive month (and fourth time ever). Combined 3DS and DS unit sales were down 34% compared to last July, and have not shown positive growth since October 2011. Combined PSP and PS Vita unit sales were down 8%.

Despite recent weakness, we think that the game publishers remain undervalued as a group, and believe that many will appreciate substantially should software sales return to positive territory. It is unlikely that gamers are abandoning their passion in favor of other forms of entertainment, and inconceivable that if packaged goods sales have declined, people formerly playing games are now doing something unrelated. Rather, we think that the market has this one wrong, and we believe that historically low valuations for the publishers present an opportunity for investors to generate positive returns.

Michael Pachter is an analyst at Wedbush Securities.