Analyst: Game Sales Rise as Companies Gear Up for E3

Source: Thinkstock

Source: Thinkstock

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

This newsletter includes our E3 2014 Preview. E3 (The Electronic Entertainment Expo) takes place next week in Los Angeles. Events start Monday, June 9, and continue through Thursday, June 12. The E3 Expo will be held at the Los Angeles Convention Center, and as many as 50,000 attendees are expected. As we approach the anniversary of the next-generation consoles, we expect E3 to again be a spectacle, full of game news and useful information for video game fans and investors.

We expect Microsoft’s (NASDAQ:MSFT) Xbox One and Sony’s (NYSE:SNE) PlayStation 4 to again be the highlights of the show, with the focus in 2014 likely on software, as opposed to multimedia features that were the focus last year. Key first-party titles on display from Microsoft will likely include Fable LegendsForza Horizon 2, Halo 5: Guardians, Quantum Break, and Sunset Overdrive. Sony will likely have DriveClub, Helldivers, The Last of Us Remastered, The Order: 1866, PlanetSide 2, and Uncharted (PS4). For Activision Blizzard (NASDAQ:ATVI), we expect Destiny, a September release from developer Bungie, and Call of Duty: Advanced Warfare, a November release, to draw the most interest. We expect Activision management to use E3 as a platform to convince investors that Destiny can indeed be a $1 billion franchise worth its reported $500 million price tag. In addition, we expect this year’s Call of Duty to be sufficiently compelling to convince investors that the franchise can stabilize or potentially grow in 2014 after declining in 2013 due to the negative impact of the console transition.

For EA (NASDAQ:EA), investor focus will be on Battlefield Hardline, the first Battlefield game to have a primary developer other than DICE. Instead, Visceral Games, known for the Dead Space games, will take the helm, with DICE helping on multiplayer. Battlefield Hardline’s showing at E3 should allow investors to gauge how well the game will fare in comparison to its predecessor, the highly-successful Battlefield 4, which we believe shipped 14 million units in FY:14. Ubisoft’s presence at E3 will likely be centered around four games: Assassin’s Creed Unity (for next-gen consoles), Far Cry 4, Tom Clancy’s The Division, and The Crew. We expect the other covered publishers, Majesco and Take-Two, to generate less buzz at E3 than their aforementioned peers, with more muted presence.

We do not expect price cuts for the Xbox One or PS4. Last month, Microsoft announced the June 9 introduction of a new $399 version of the Xbox One that does not include Kinect. The current version of the Xbox One that comes bundled with Kinect retails for $499, a $100 premium to the PS4.Given the PS4’s success so far, and the financial struggles of parent Sony, a PS4 price cut appears unlikely. On April 16, Sony announced PS4 sell-through of over 7 million consoles worldwide as of April 6. In comparison, on April 17, Microsoft announced Xbox One sell-in of over 5 million consoles worldwide since launch. We believe that in the minds of many consumers, Microsoft failed to justify charging $100 more than its rival for Kinect. Although Microsoft will be introducing a stand-alone Kinect later this fall, we continue to believe that it is not viewed as a must-have item by many core gamers, and Microsoft’s assertions on the contrary at E3 will likely fall on mostly deaf ears.

We expect price cuts for the Xbox 360 and PS3 in order to jumpstart hardware and software sales. We believe current-gen weakness has been the primary driver of industry declines over the past 18 months. As a result, we expect Microsoft and Sony to drop current-gen console prices by at least $50, and to introduce new bundles featuring first and third-party content.

We expect Nintendo to have a more subdued E3 than its peers. We expect a number of high-profile game announcements for the Wii U, which continues to struggle despite a September 2013 price cut. We believe Super Smash Bros. will be the most high-profile Wii U release on display, with a broadcasted invitational tournament on Tuesday. We do not expect a lot of compelling third-party content for Nintendo hardware. In addition to games, Nintendo may also announce a Wii U hardware price cut of up to $50 to further jumpstart sales, with a Wii hardware price cut to $99 a possibility as well.

In May, Activision Blizzard, Electronic Arts, King, and Take-Two reported better-than-expected results, GameStop (NYSE:GME) reported results that were roughly in line with expectations, and Nintendo and Ubisoft reported EPS misses.

The Wedbush Video Game Index, our market cap-weighted index of video game companies, was up 12 percent for the month of May, reflecting positive months for each of the covered publishers except Majesco. EA had the strongest month, up 24 percent after announcing a Q4:14 beat and providing better-than-expected FY:15 EPS guidance driven in part by digital growth. Ubisoft shares were up 9 percent reflecting bullish guidance and a strong initial response to the record-breaking Watch Dogs. GameStop shares were down 5 percent as many investors remained concerned about its long-term prospects in an increasingly digital industry. The S&P 500 and Russell 2000 were up 2 percent and 1 percent, respectively, as positive economic data eclipsed the revision of Q1:14 GDP numbers into negative territory that was blamed on extreme weather conditions.

Michael Pachter is an analyst at Wedbush Securities. 

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