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Upcoming Console Battle May Signal Video-Game Rally

19 July 2013 in Trading Ideas

The news last month from the video-game sector wasn’t pretty. US console and handheld game-software sales plunged 31% in May from a year earlier, marking the fourth consecutive month of decline – and the lowest level of sales in 13 years.1

So, why, after a June slump, are many video-game stocks on the rise?

Welcome to the wonderful world of the video-game industry’s product cycles, a concept familiar to longtime sector watchers – or, for that matter, to investors in tech-product king Apple.

It’s not hard to grasp, really: there’s the boost in buzz surrounding the anticipation of new products, the increase in sales upon the release of these new products, then the gradual disinterest as sales growth begins to wane. (Then for the next cycle: add, rinse, repeat).

online gaming world

As investment firm Wedbush Securities noted upon the dismal May sales numbers, “It is clear many core gamers are foregoing purchases as they prepare for the next-generation console launches later this year.

And now, some video-game investors may be realizing that it’s time to get back into the space as game software makers stand to benefit from the influx of those consoles and key game titles later this year. The Online Gaming World motif is up 5.4% in the past month. During that same timeframe, the S&P 500 is up 2.3%.

First, the consoles: Microsoft said earlier this year that it will release the Xbox One, its first new console in eight years, sometime later in 2013. The release will include an exclusive “Halo” series produced by Steven Spielberg.2

The Xbox will go toe-to-toe with Sony’s latest PS4 game console, expected this fall.

In connection with the new console cycle, the industry’s two biggest game-makers (who, incidentally make up more than 45% of the weighting in the Online Gaming World motif) will release new versions of their key game franchises later this year. Activision is expected to release an updated “Call of Duty” game this November, while Electronic Arts will counter with the fourth iteration of its “Battlefield” series.

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While the success of any of these new consoles or game titles is no guarantee, the perception by investors that the sector deserves some attention may be enough to warrant consideration.

1“May Videogame Sales Offer Little Consolation,” Barrons.com, June 18, 2013, http://online.barrons.com/article/SB50001424052748704311204578553423788520566.html?ru=yahoo&mod=yahoobarrons, (accessed July 16, 2013).

2Debra Borchardt, “Time to buy video-game stocks?”, MSNMoney.com, May 22, 2013, http://money.msn.com/technology-investment/post.aspx?post=beb59959-34dc-4f7a-a63c-8c450994240a, (accessed July 16, 2013).