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Should Video Game Industry's Recent Sales Bother Investors?

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As per a VentureBeat report, The NPD Group issued video game sales numbers for the month of November, which has been nothing short of dismal. This is concerning especially because November is generally one of the biggest months for video game companies, which look to cash in on the holiday fervor. This is not the case this time.

NPD’s Video Game Sales Data

If we go by NPD’s report, overall sales tanked 24% year over year to $1.97 billion. In fact, every category witnessed a record drop. Despite the release of Sony Corp’s SNE PlayStation 4 Pro and Nintendo’s NTDOY NES Classic (which sold 196K units), hardware sales fell 35% to $723.8 million. Though sales of Nintendo’s 3DS surged 59%, it was more than offset by declines in Microsoft’s (MSFT - Free Report) Xbox One and PS4 sales.

Tougher year-over-year comparisons marred console software sales, which fell 18% to $955.2 million. PC software tanked 28% to $27.5 million and accessories sales were down 6% to $259.8 million.

Per NPD’s analysis, last year, there were three phenomenal hits in the form of Activision Blizzard’s ATVI Call of Duty; Black Ops 3, Electronic Arts EA Star Wars Battlefront and Bethesda’s Fallout 4. Black Ops 3, a hit series in the COD franchise, was expected to do well while Battlefront benefited from the release of Star Wars: the Force Awakens, the first Star Wars movie in a decade. Star Wars is a cult and no wonder Force Awakens netted over $2 billion at the box office, giving Battlefront sales a terrific boost.

However, this year’s Call of Duty: Infinite Warfare has failed to recreate that magic with many media reports claiming that sales (physical copies) were down as much as 50% compared with sales of Black Ops 3. Despite this, Call of Duty: Infinite Warfare was still the number 1 selling game in November. What’s striking is that nobody expected Infinite Warfare to outsell Black Ops 3 as the former is a relatively less recognized series. However, a 50% drop was unexpected. 

Battlefield 1 and Pokémon Sun performed well but the release of these games at a lower MSRP dampened sales, adds NPD. Notably, titles apart from the top three games, saw 12% growth. Other games in the top 10 are Pokémon Moon, Titanfall 2, NBA 2K17, Madden NFL 17, Watch Dogs 2, The Elder Scrolls V: Skyrim and FIFA 17.

Should Investors Panic?

With such dismal data, investors are most likely to press the panic button. However, we would advise against it. Last year sales benefited highly from the release of three relatively bigger titles, which was not the case this year. Plus, analysts observe that gaming industry is "cyclical" and therefore last month’s poor show shouldn’t pose much concerns for investors. Consoles are getting old and it’s a no brainier that sales will dip. However, upgrades to Sony’s PS4, revival of NES Classic and launch of a new Nintendo console in January should bode well for hardware sales going ahead.

Also, another big transition witnessed in the gaming industry is that digital sales are ramping up, which will in turn impact physical sales. Compared with the physical platform, digital games are more profitable due to minimum packaging cost. This cost effectiveness will help publishers to use the digital format to keep a popular franchise running profitably over a longer period of time. 

Plus, companies have been trying to adopt an all year-round model for their super hit franchises instead of a launch-based model in which majority earnings and profits are derived in the first week to boost engagement levels. This bodes well for long-term performance observe analysts.

At present, most of the heavyweights in the video game industry like Activision, Sony, Take Two Interactive TTWO, and Nintendo all carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Year to date, Toys/Games/Hobby products industry has witnessed gain of 8.85% compared with the S&P 500's gain of 8.38%

Toys - Games - Hobbies Industry 5YR % Return

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