Strong Console Sales To Drive Revenues For GameStop & Electronic Arts

According to the research group NPD, the next generation twin console- the Microsoft (NASDAQ:MSFT) Xbox One and the Sony PlayStation 4 are still in huge demand, which might benefit video game retailers such as GameStop (NYSE:GME). In its latest June report, NPD reported that gamers spent $736.4 million on new physical video game products at U.S. video game retail shops, up 24% from $593.5 million in June 2013. ^[1] In the month of May, gamers spent $586 million on new physical gaming products- hardware and software.

Considering that consumers spent $ 292.7 million on new hardware alone, gaming industry believes that the twin consoles still have a lot of demand among the core gamers. This might be due to the upcoming new titles to be released in the markets by core game developers such as Electronic Arts (NASDAQ:EA), Activision Blizzard (NASDAQ:ATVI) and Nintendo. With most of the games released on only the new platforms, gamers were forced to buy the next generation consoles.

Although the new software sales have picked up the pace, they are still lagging the hardware sales and are much below the last year sales. Gamers spent only $286.8 million on new game titles in the month of June, down 3% year-over-year. After six months of dullness in title sales, the industry finally witnessed acceleration in the software demand in the month of May, but it still lacks luster. ^[2]

GameStop is positive on its outlook for the upcoming quarters, as it expects strong hardware sales in the previous quarters to translate into better software sales. Top game developers such as Electronic Arts (NASDAQ:EA) and Activision Blizzard(NASDAQ:ATVI) unveiled their most awaited games of the year at the E3, revealing trailers and prototypes of newer editions of their famous title franchises. With a turnout of around 49,000, E3 also witnessed other video game developers such as Microsoft(NASDAQ:MSFT), Sony Corporation, Ubisoft and Nintendo disclosing concept visuals and early designs of their title releases. With a significant number of software titles and hardware accessories to be launched over the next 12 months, GameStop expects its pre-owned products segment to benefit from increased sales. Increase in console sales might translate to excellent initial sales for the core game titles such as EA’s FIFA 15, Titanfall, Battlefield Hardline & Madden NFL, Activision’s Call of Duty: Advanced Warfare and Ubisoft’s Watchdog.

Our price estimate for GameStop’s stock is $47, implying a premium of 17% to the current market price, whereas that for for Electronic Arts’ stock is $27, which is 40% below the current market price.

See our complete analysis of GameStop and Electronic Arts

GameStop

• New Hardware & Software Sales Might Boost Overall Sales

After a positive report from NPD in terms of hardware sales for the month of June, GameStop is optimistic of its sales growth for the hardware segment. New video game hardware sales rose 27% in 2013, contributing around 19% to the company’s overall revenue growth. ^[3] However, in the first fiscal quarter of 2014, company’s hardware sales increased 81%, stronger than U.S. market’s average of 61% growth.

PlayStation 4 retained the #1 spot for the top selling console for the 6^th month in a row, outpacing Microsoft’s Xbox One. Combined total sales of these two consoles are near about 80% higher than the combined sales of Xbox 360 and PlayStation 3. This might boost the segment’s revenue, but since this a low margin segment (gross profit margins were 10.2% for this segment in 2013), this might possibly have no major impact on company’s valuation.

Now, since increase in hardware sales might translate to better software sales in the coming months, we might also witness a growth in new video game software segment, which is a high margin segment for the company. New software sales accounted for 39% of the overall company sales and 30% of the total gross profits in 2013. Moreover, with the release of new core game titles in the coming months, company is quite positive with the segment’s revival. Increased software sales coupled with better hardware sales might boost the company’s valuation.

Electronic Arts & Activision Blizzard

• Initial Title Sales To Benefit From Increased Hardware Sales

Increased sales of the next generation consoles have raised the expectations of the game developers such as Electronics Arts and Activision. The two gaming giants usually release the annual edition of their franchises in the latter half of the calendar year. With the hardware console sales still strong in the market and outperforming last year’s performance, both the companies might be looking forward to the release of titles such as FIFA 15, Madden NFL and Call of Duty, which would be available initially on PS4 and Xbox One.

Currently, EA’s Titanfall is available only on Xbox One & Xbox 360 and FIFA World Cup Brazil is available on PlayStation 3 and Xbox 360. The company might unveil its edition for Xbox One and PlayStation 4, since most of the gamers own the new consoles. Moreover, Activision’s Call of Duty: Advanced Warfare is set to be released in November on all major platforms. FIFA 15 and Madden NFL will be released on all major platforms as well.

Both the companies expect the initial sales of these titles to rise, considering hardware sales would translate to better software sales. As these titles are the core profitable franchises, a boost to their sales would drive the overall revenues of the companies.

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1. June 2014 NPD [↩]
2. May 2014 NPD [↩]
3. GameStop’s Q4 2013: Earnings call transcript [↩]