E3 Preview: Video Games Ready for New Industry Moving Releases

Video game analyst Michael Pachter at Wedbush Morgan has your Cheat Sheet to this year’s E3 Conference which starts today:

We expect E3 highlights to include Nintendo’s (PINK:NTDOY) Project Café (the successor to the Wii), Sony’s (NYSE:SNE) NGP (the successor to the PSP), and a number of high-profile upcoming releases headlined by shooters — Activision’s (NASDAQ:ATVI) Call of Duty: Modern Warfare 3, Electronic Arts’ (NASDAQ:ERTS) Battlefield 3, and Microsoft’s (NASDAQ:MSFT) Gears of War 3. We also expect several new games to be unveiled, with the three console manufacturers vying to “win” the show with the biggest first party lineup.

We do not expect any major price cuts at E3, due to the continued popularity of the Xbox 360 and the recent cuts implemented by Nintendo. Given the phenomenal sales growth of the Xbox 360 in 2011, Microsoft (NASDAQ:MSFT) will likely wait until sales begin to decline before considering a price cut. We expect Sony (NYSE:SNE) to be a price-taker, and to cut the PS3 price only after Microsoft acts first. Nintendo recently cut the price of the Wii and DS Lite, so an additional cut is unlikely.

While several announcements could serve as catalysts, we expect the show to have a limited overall impact on the share prices of the major video game publishers. Activision (NASDAQ:ATVI) made a major announcement this week, and most of the major titles from the other publishers for 2012 are already known.

The biggest May announcement was Activision’s (NASDAQ:ATVI) implementation of a subscription service for Call of Duty. The service (called Elite) will involve a monthly payment (likely $4 – 6) in exchange for premium content, likely including all map packs, significantly enhanced achievements, ladders, strategy guides, friend lists, etc. We expect 1 million subscribers to the service by year-end, and assume negligible financial impact in 2011. After the first million subscribers, each 1 million incremental subscribers should add $0.02 – 0.03/share annually.

In May, Activision Blizzard and Take-Two (NASDAQ:TTWO) reported better-than-expected results, while Electronic Arts, GameStop (NYSE:GME), THQ (NASDAQ:THQI), and Ubisoft (EPA:UBI) reported results that were in-line with expectations. In addition, Sony reported Q4 results.

The Wedbush Video Game Index—our market cap-weighted index of video game companies—outperformed the broader market averages with a May decrease of only 0.5% due to better-than-expected software sales growth for April. The S&P 500 (NYSE:SPY) and Russell 2000 (NYSE:IWM) decreased 2.4% and 3.5%, respectively, due to concerns over European debt and domestic jobs data. Share prices for five of our covered companies increased in May, with Electronic Arts (NASDAQ:ERTS) up 18.4% due to strong guidance and NPD data, and GameStop up 9.9% due to market share gains and digital growth. Majesco (NASDAQ:COOL) had the worst month, down 14.9% as some of the excitement around Zumba Fitness subsided. On a constant f/x basis, the Index increased 1.4%. The Index increased 4.5% excluding Nintendo, and 4.5% on a constant f/x basis excluding Nintendo.

Total U.S. console software sales for April were $503 million, up 26% from last year’s $399 million, and well above our estimate of $460 million (up 15%).

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