2 Ways to Play the Gaming Market: Activision Blizzard, Inc. (ATVI), Sony Corporation (ADR) (SNE)

Investors are viewing the ecosystem that supports console gaming with skepticism. Are there stocks in this space that are cheap enough to justify jumping in?

In 2012, the video game market witnessed a major shift in consumer preference as they moved from conventional console games to mobile-based games on their tablets and smartphones. According to the data compiled by research firm NPD, sales of physical games in 2012 plunged 22% to $8.88 billion while digital game sales increased by 16% to $5.92 billion.

Some support to the video game industry is expected to come from China, which could lift its ban on game consoles after 13 years. According to TechWeb’s 2012 China Game Industry Report, the video game industry in China is estimated to be about $10 billion in 2011. The Chinese Ministry said that they are reviewing the current policy about the opening of the game console market and have also conducted various surveys and entered into discussion with other ministries regarding this issue. The restriction was imposed by seven ministries, and hence approval would be required from all seven of them to lift it.

Individual Stock Outlook

Activision Blizzard, Inc. (NASDAQ:ATVI)’s shares surged in February 2013 after it reported that its fourth quarter results were above analyst expectations. The company sales were boosted by its “Call of Duty” and “Skylanders” franchises, which ranked as the number 1 and number 3 best-selling game franchises in 2012. Take-Two Interactive Software, Inc. , Inc. reported that its net income increased to $71.4 million during the third quarter as compared to a net income of $14.1 million during previous year. The company expects to launch Grand Theft Auto V in September this year.

Sony Corporation (ADR) (NYSE:SNE) is expected to launch a new “PlayStation 4” console system. The new console is expected to bring a new life to the video game business, which has suffered declining sales and questions about the future of game console systems. It has been seven years since the company launched PlayStation 3. This console was a hit, selling about 77 million units globally, but now the company’s game business faces a stiff challenge from Microsoft Corporation (NASDAQ:MSFT)’s Xbox and a secular disruption across the entire industry as smartphones and tablets have become competing game platforms. Microsoft is expected to commence the sale of a new Xbox with higher processing power and new home entertainment features by the end of 2013.

Sony Corporation (ADR) (NYSE:SNE) and its peers are trying to entice gamers to pay premium prices with high-definition, immersive game experiences. Various companies are working together to put their consoles front-and-center in the home as entertainment hubs, making them replacements for set-top boxes that cable companies offer as a part of their service.

According to Colin Sebastian, an analyst for Robert W. Baird, “Sony and Microsoft have to convince consumers that there is a compelling reason to upgrade to the new hardware.” The new console would use off-the-shelf chip components, and Advanced Micro Devices, Inc. (NYSE:AMD) is expected to gain the key slots for the central-processor and graphical-processor units. According to Michael Pachter of Wedbush Securities, “You’re going to get a box that’s 4-8 times faster than what’s currently out there, with a commodity CPU-GPU combination.” He also said that the technical innovation in the new console would offer larger things on the screen at once.