PS3 price cut can only be consoling

Video game sector looks to reverse sales slump

Sony said Tuesday that it will cut the price of its PlayStation 3 by $100, to $299, when a slimmed-down version of the video game console hits stores in a few weeks. The news led to talk that Microsoft and Nintendo will follow suit by lowering the prices of their respective Xbox 360 and Wii consoles.

If so, the moves couldn't come at a better time for the video game industry, which in July racked up its fifth consecutive month of declining year-over-year sales. Prevailing wisdom suggests consumers are holding back on purchasing a PS3, and therefore games, until the new, cheaper version is on shelves.

The impending PS3 catalyst and the mere thought of cheaper Xbox 360s and Wiis apparently are enough to keep Wall Street analysts and investors enthusiastic about video game stocks.

In the U.S. in July, every category of video game sales fell compared with the same month last year, with hardware falling furthest at minus-37% to $281 million, according to NPD Group. Software was next, tumbling 26% to $437 million, followed by accessories, down 12% to $131 million.

Add 'em up, and it amounts to a 29% decline to $849 million.

Other stats that traditionally receive less attention also are indicative of an industry slump: The average price of a game fell 10% to $36.28 year-over-year, and only nine games sold more than 100,000 units apiece in July, compared with 18 during the same month last year. (This July's best-selling games were Electronic Arts' "NCAA Football 10," with 613,900 units moved, and "Wii Sports Resort," with 508,200).

But the industry's rough patch has spared investors pain. In fact, video game stocks year-to-date have outperformed broader markets by a wide margin. THQ is tops, its stock having gained 42% in 2009, followed by Activision Blizzard (41% higher), Take-Two Interactive Software (29%) and Electronic Arts (22%).

Console makers Sony and Microsoft are up 26% and 23%, respectively.

By comparison, the S&P 500 is up 9.6% and the Dow Jones average is up 5%.

GameStop, the nation's top game retailer, is set to report quarterly financial results Thursday. Its shares are up 18% this year.

So it appears Wall Street isn't too concerned about the dismal NPD numbers despite the fact that, for the most part, they come in below analysts' expectations month after month.

"Comps start getting much easier in August and through the rest of the year, and a well-timed console price cut could serve to reverse the negative trend," Michael Pachter of Wedbush told his clients after the NPD numbers were released last week. "We expect sales to turn less negative in August and to turn wildly positive in September."

FTN Equity analyst James Hardiman sounded a similar theme Monday when he initiated coverage of the video game sector, calling Activision a "buy" and coming out "neutral" on EA, Take-Two and THQ.

Hardiman says Sony's PS3 price cut "could serve as just the catalyst the industry needs heading into the fourth quarter."

Now that the PS3 catalyst has all but arrived, will it be a case of selling the news after buying the rumor all year long? Most analysts say no, remaining steadfastly bullish on video game stocks despite their outperformance sharewise and underperformance industrywise.

"This is one of the necessary steps to help the industry resume showing positive trends in the latter part of calendar 2009," BMO Capital Markets analyst Edward Williams said Tuesday, when he reiterated his "outperform" rating on the sector.