Video Game Sales Weak in May

No surprise: video game sales were weak again in May.

According to the NPD Group, May 2009 video game sales came in at $863.3 million, down 23% from May 2008. Software sales were down 17% to $448.9 million. Hardware sales dropped 30% to $302.5 million. Accessories were down 25% to $112,000.

May, which is typically the weakest month of the year for video games, marked the third straight month of sales declines. Year-to-date, video game sales are tracking 7% below the first five months of 2008.

Sales were soft across the board due to the lackluster release schedule and difficult economic conditions. Still, there were a couple of bright spots: THQ's (THQI - Snapshot Report) UFC 2009 Undisputed sold over 1 million units on the Xbox 360 and PlayStation 3 consoles, and the Wii Fit w/ Balance Board and EA Sports Active Bundle (both for the Wii) sold 353k and 346k units, respectively.

Nintendo also announced that it sold its 20 millionth Wii game system in May. The Wii success is due to its motion control system, social gaming platform and games aimed at kids and families -- two groups that were largely ignored by video game publishers for years.

As we've written before, we still believe that video games are going to be a second-half story in 2009. Typically, the back half of the year accounts for two-thirds of annual video game sales, but this year that percentage may climb even higher. Video game publishers have pushed back the release dates for the games with the most potential.

The release schedule for the third quarter and holiday season looks potent, with titles including Madden NFL 2010, The Beatles: Rock Band and Modern Warfare 2. What's more, we continue to believe that Sony (SNE - Analyst Report) will cut the price on its PlayStation 3 this year, and that will spur another round of console sales and subsequent game sales.

A good way to play this second-half story is GameStop (GME - Analyst Report). The retailer's shares have been beaten up this year, as investors have worried about the slowdown in video game sales. As investors begin to realize that gamers will be back in the stores buying those higher-quality games, GME shares should move higher. We rate GameStop a Buy with a $34 target price.