The video game sector is showing weaker sales. The rhythm-music genre is seeing its profits erode. Unemployment is still an anchor on any economic growth. What makes this company attractive for purchase?
In introductory economics texts, you read about products known as “substitutes.” In essence, two goods are viewed as occupying a relatively similar niche, and while there is always some product differentiation, more often than not it comes down to price. It is helpful to think about American Beer as an example – individuals may have a slight taste preference for Bud Light versus Miller Light, but the consumer tends to drink whichever beer the bar/grocery store has a special on that day.
How does this relate to the video game industry? For the first time, there are individuals entering the workplace who have never existed in a world without Nintendo. For these people in their 20s, playing a video game is as common a way to spend leisure time as going to a movie, going out to a bar, or watching television. The thing that really separates the video game industry from these other discretionary, leisure activities is how cost-effective it is. A video game like Call of Duty: Modern Warfare 2 has 10-20 hours of single player gameplay, with infinite replay value in the multiplayer format. For $50 or $60, this is extremely reasonable. Similarly, players are known to easily log over 2 days of playing time with the Blizzard hit “World of Warcraft.” Again, we see players willing to spend $15 a month for 50+ hours of entertainment.
Does the viewpoint of video games as a cost-effective leisure activity hold up? To an extent. Yes, the sector is down heavily year over year – but Modern Warfare 2 just had the largest launch in video game history. The recession isn’t hurting “flagship” video game franchises. Consumers know that the Call of Duty, World of Warcraft, Starcraft, and Diablo series represent hours of high-quality, cost effective gaming. It is my fundamental belief that with each video game launch in their core gaming franchise, ATVI will persuade investors that flagship video game sales are less discretionary than previously believed.
Sales figures for Modern Warfare II continue to be astronomical. World of Warcraft has yet to show any real deterioration in their subscriber base outside of Chinese legislative issues (since resolved). Starcraft and Diablo are slated for release in 2010 (with a possible push back to 2011). World of Warcraft’s new expansion will be a must-buy for each of the game’s current subscribers. The outlook for this company is bright in 2010.
Current Price (12/21 Close): $10.98
Target Price: $18
Main Driver: Strong Q4 2009 sales, increasingly resilient sales in core franchises, strong expected Q1 and Q2 2010 earnings
Additional Upside: Yes. If video games are recognized as more of a consumer staple (less subject to economic fluctuations), there is the possibility of larger returns.
Expected Sell Date: Q3-Q4 2010
I have owned ATVI shares since Q4 2008.