These Gaming Stocks Are Waiting For a Spark

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

We expect March U.S. retail video game console software sales data to be released by the NPD Group after the markets close on Thursday, April 18.

We expect console software sales of $570 million, up 1 percent compared to last year’s $563 million due to a strong release slate and a manageable comparison (down 24 percent). We expect positive monthly growth for only the second time since late 2011. We note that January 2013 was up slightly at 1percent. However, that month benefitted from an extra week in the measurement period in 2013 due to the vagaries of the 52/53 week retail calendar, so sales actually comped down on a likefor-like basis. As such, March has the potential to be the first month of true growth (same number of weeks for this March and its comparison period) since November 2011.

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We believe this year’s top releases as a group, highlighted by Microsoft’s (NASDAQ:MSFT) Gears of War: Judgment, Square Enix’s Tomb Raider, and Take-Two’s (NASDAQ:TTWO) BioShock Infinite, can outperform last year’s top releases, including Capcom’s Resident Evil: Operation Raccoon City and EA’s (NASDAQ:EA) Mass Effect 3, and more than offset continued catalog weakness.

Exhibit 1: Estimated Console Software Sales (by Publisher):

Sales ($ millions)

YoY % change

MoM % change

Activision Blizzard

$55

27%

4%

Electronic Arts

$67

-52%

-18%

Majesco

$6

-52%

19%

Nintendo

$51

-19%

37%

Take Two Interactive

$99

158%

272%

Ubisoft Entertainment

$26

-1%

-6%

Covered Publishers

$304

-6%

32%

Overall Industry

$570

1%

62%

Publishers as percentage of market: 53 percent

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

We expect March console software sales to be led by new releases Microsoft’s Gears of War: Judgment, Nintendo’s Luigi’s Mansion: Dark Moon, Sony’s (NYSE:SNE) God of War: Ascension, Square Enix’s Tomb Raider, and Take-Two’s BioShock Infinite, as well as Activision Blizzard’s (NASDAQ:ATVICall of Duty: Black Ops II. PC new releases Activision Blizzard’s StarCraft II: Heart of the Swarm and EA’s SimCity had strong debuts. However, as PC games, both will be excluded from NPD’s console sales data.

We expect hardware sales of 55,000 Wii U units in its fifth month (down 17 percent month-over-month), 85,000 Wii units (down 51 percent year-over-year), 290,000 Xbox 360 units (down 22 percent y-o-y), 260,000 PS3 units (down 22 percent y-o-y), 85,000 DS units (down 20 percent y-o-y), 195,000 3DS units (down 16 percent y-o-y), and 42,500 PS Vita units (down 80 percent y-o-y).

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In February, combined current-generation home console (PS3, 360, Wii, Wii U) hardware unit sales were down 27 percent y-o-y, while handheld hardware unit sales were down 49 percent, resulting in overall hardware unit sales being down 36 percent. We expect negative momentum to continue for the most part until the release of the new consoles from Microsoft and Sony.

We expect packaged goods weakness to persist for much of 2013, albeit with intermittent reversals. We next expect positive growth in September (the launch month of Take-Two’s Grand Theft Auto V), and do not expect sustained growth until 2014, as new consoles from Sony and Microsoft are expected to launch late this year and cause a rebound in software sales growth shortly thereafter.

Michael Pachter is an analyst at Wedbush Securities.

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