Sony, meanwhile, scored a public relations win when it stated that it wouldn’t impose any limits on physical copies of games. Moreover, as Microsoft Corporation (NASDAQ:MSFT) has focused on selling the Xbox as a media center, Sony has pitched the PlayStation directly at hard-core customers. Sony clearly looks to have an early edge, though the machines aren’t out yet.
The Real Winners
While Sony and Microsoft Corporation (NASDAQ:MSFT) duke it out and GameStop fights to remain relevant over the long term, the new systems are likely to be particularly beneficial to game makers. True, GameStop will see a nice boost in the near term, but those sales will also flow through to Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA).
Game sales spike when a new console upgrade cycle begins. Electronic Arts Inc. (NASDAQ:EA) will be happy about that, since its top line has fallen year-over-year in each of the last four quarters. That’s likely because customers are waiting for the new game machines before spending their money. Still, the company needs to reverse the sales trend as soon as possible.
The company’s profit margin is in the low single digits right now, but increased sales could quickly boost that figure since selling additional copies of a game is virtually cost free once the software has been written. While a return to margins in the low 20’s is probably a ways off, low teens isn’t an unreasonable expectation. If that happens, there’s decent upside potential for both earnings and the shares, but investors will likely have to buy in before the consoles hit the market.
Stronger, but Still Waiting
Activision Blizzard, Inc. (NASDAQ:ATVI), meanwhile, has posted higher annual sales in each of the last 10 years, even through the 2007 to 2009 recession. So, clearly, the company is better positioned than EA right now. In fact, after the bottom line dipped into the red in 2008, Activision’s earnings have rebounded strongly reaching their highest levels of the decade (around a dollar a share last year), with profit margins nearing 30%. That said, it wouldn’t be surprising if sales were relatively weak until the holiday season.
The shares appear to have broken out of the range they’ve been mired in since the end of the recession. So momentum investors might find it of interest. That said, the company’s strong results with the prospect of a boost from game console launches should interest growth investors, too. Like its main competitor, though, getting aboard before the new consoles hit is probably a good idea.
Used Games
Activision and EA will ultimately benefit from both the launch of new game machines and the natural shift toward online game sales. While GameStop should see a quick boost from used game trade ins at the start of this upgrade cycle, longer term this important business is dying. That said, Microsoft Corporation (NASDAQ:MSFT)’s failed effort to speed up the demise of the used game market may be a strategic error that helps shift gamer loyalties to Sony.
The article The Used Video Game Problem originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard, GameStop, and Microsoft. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
