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Are Game Company Stocks Due to Soar in 2006? December 20, 2005 In December, DFC Intelligence likes to jump into the fray and take a look at stock prices and market value. Over the years, we have noticed a trend where there tends to be a run-up in game company stock prices in anticipation of the holiday season, followed by a slowdown during the actual holiday season when there are concerns that sales are slower than expected. This year is a little different because the launch of the Xbox 360 brings in a new generation of game systems. Therefore we thought this month we would look back at where we have been during this past generation, since the launch of the PlayStation 2 in late 2000. As the chart below shows, the market value of leading interactive entertainment companies has been up 7% from February 2005 through December 2005. This is despite the fact that going into 2005 expectations for the game industry were actually quite low and sales in the early part of the year significantly exceeded most expectations. The second half of the year has been a different story with sales off significantly. However, despite a minor November/December decline, stock prices have held up fairly well (see chart below).
Market Value of Leading Interactive Entertainment Companies
Estimated market value in
millions from the stock price on 2/8/05. For companies that do not report in
U.S dollars the exchange conversion was done at 1USD = 105 yen, 1 USD = .55
British pounds and 1USD = 0.8Euro
The current stock price trends are actually fairly consistent with what happened five years ago. Furthermore, if history is a guide, it could mean that even if sales slow significantly in 2006 (as expected), stocks could be up. In the five-year game console cycle, 2006 is most comparable to 2001. In 2001 the PS2 was just starting to build its base and anticipation was growing for the release of the Xbox and GameCube toward the end of the year. Meanwhile, sales for the existing systems were declining rapidly. Nevertheless, as the chart below shows, excitement over the new systems helped drive game company stocks to record heights in 2001. Game Company Stock Prices: 2000-2005
Take-Two Interactive (NASDAQ:TTWO); Activision (NASDAQ:ATVI); THQ (NASDAQ:THQI); Electronic Arts (NASDAQ:ERTS); Atari (NASDAQ:ATAR)
Overall, stock prices for most of the major companies have done very well this generation. However, as the charts show a significant part of this run-up occurred at the start of the new generation. 2002 was actually a down year for almost all major companies except Take-Two (who had the monster hits Grand Theft Auto III and Grand Theft Auto: Vice City). In 2002, the new platforms were out on the market and actually starting to establish an installed base. In today’s market this will not occur until 2007. What was clear in 2002 was that expectations for the new generation were too high and thus disappointment was sure to follow. The 2000/2001 generation of game systems eventually lived up to most expectations, just not fast enough for many investors.
So obviously, history begs the question of what expectations will be for the new generation. Will 2006 see a large run-up in stock prices, only to see a slump in 2007 when investors realize that a new generation takes time to build? Or, have investors become conditioned to the swings/slowdown caused by a platform shift? We don’t know the answers to those questions, but we will be watching closely to see how it unfolds over the next two years. On a more immediate note, we have spent the holiday season visiting all the major retail chains to evaluate stocking, shelf space, displays and other merchandising issues. We will have a full report early in 2006, however some early notes indicate that the Xbox 360 is getting prominent display. What we have not been able to find is actual Xbox 360 units. After visiting nearly 30 leading retail stores we have yet to stumble on a 360, although all stores have plenty of 360 games and accessories. The biggest disappointment we have found so far is what we would consider to be very weak merchandising for the Sony PSP. Many stores have displays for the Nintendo portable systems, but not the PSP. What is worse is the tendency for stores to have a larger selection of UMD movies than PSP games. Furthermore, the movies are often mixed right in with the games. The portable battle is likely to get very interesting over the next two years. As part of our ongoing research efforts DFC Intelligence is delivering monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of reports on the video game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2010. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems. The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends. Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports. The Online Game Market This 660 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles. The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.
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