Analysts Predict Reversal of U.S. Video Games Sales Slump
U.S. video game industry sales have been sliding all year with double-digit declines in games and total industry sales.
The sector has been hit by lower purchases of packaged console games, which can cost as much as $60 each. Continued gains in mobile and other digital games have not quite offset the drop in the traditional business.
The declines this year continue a trend of recent years, but now some analysts predict that the gaming sector could see a trend reversal, which could also boost industry stocks.
"The relentless decline in packaged good software sales, which is now concluding its fourth consecutive year, has been a major determinant of negative investor sentiment around the video game publisher group," said Cowen analyst Doug Creutz in a report just ahead of the Thanksgiving weekend, which traditionally kicks off the core holiday selling season for games companies.
Several analysts have come out to predict that holiday season games sales could come in roughly unchanged from last year's levels, helped by such big releases as Call of Duty: Black Ops II, which set new records with its first-day sales.
"We expect retailers and vendors to support the category with significant marketing dollars and promotional activity to drive foot traffic and hardware unit sales" starting Friday, known as Black Friday and one of the year's big shopping days in the U.S., said BMO Capital Markets analyst Edward Williams. "Retailer comments from last week suggest that recent launches of key hits have performed well."
Overall, he predicted a "video game reset" starting with the holiday season.
Earlier this month, Liam Callahan, industry analyst at research firm NPD Group, said that "while October was another month of steep declines in retail sales, we are looking forward to November with the results of Assassin’s Creed III, and Halo 4, which were positively reviewed, as well as the results of Call of Duty: Black Ops II. These software titles, along with the Wii U launch on Nov. 18, will provide a much needed boost to retail sales.”
Creutz even believes that the trend of lower or flat sales "will sharply reverse in the first half of 2013 due to a rare combination of favorable factors." He predicts that game software sales will grow in the double-digits percentage range over the first six months of 2013 and potentially even by nearly 50 percent.
"As a result, we think sector sentiment could meaningfully improve early next year, particularly as anticipation grows around potential new Microsoft and Sony console launches," which are not likely to lead gamers to hold off on games purchases until the back-half of 2013, he said.
One new launch, that of Nintendo's Wii U this month, is widely seen as a likely industry boost.
It "will likely reverse the very negative Wii software sales trends that have dogged the industry for the past several years," Creutz said. Year-to-date, Wii software sales are down nearly 50 percent.
Big upcoming games releases will also help. Grand Theft Auto V, the long-awaited new release in the powerhouse franchise, is scheduled for a spring release. "By itself, GTA V is likely to contribute 16 percent to 30 percent to overall year-over-year growth," said Creutz. "However, there are several other big releases scheduled for the first half of 2013, including Gears of War: Judgment, God of War: Ascension and Bioshock Infinite.
And the 2013 calendar will also contribute to help the gaming sector early in the year. "Due to the vagaries of the retail calendar, the first half of 2013 will also include an extra week of sales, likely adding about four percentage points to the overall growth rate," Creutz said.
Which video gaming stocks do Wall Street analysts recommend? Wedbush Securities analyst Michael Pachter maintained his "outperform" rating, similar to a "buy," on Activision after the strong start for the latest Call of Duty game.
Drew Crum of Stifel, Nicolaus also emphasized his "buy" rating on the stock.
And Eric Handler of MKM Partners has a "buy" rating on Activision and a "neutral" on competitor Electronic Arts.
But Williams sees upside for both sector biggies: "In general, we continue to believe that 'outperform'-rated Activision and Electronic Arts are well positioned for the long term."