3 Reasons to Dump Video Game Stocks

It's been a rough week for the video game industry.

The normal trickle of bad news has been more of a deluge since yesterday with at least three problematic developments taking place.

  • Shares of Take-Two Interactive (NASDAQ: TTWO  ) dropped sharply lower this morning after it announced a Sept. 17 release date for Grand Theft Auto V. The highly anticipated release was previously targeted for a springtime release.
  • Electronic Arts (NASDAQ: EA  ) may be moving higher today after posting mixed quarterly results last night, but let's not sugarcoat the top-line slide. Revenue fell sharply as the modest uptick in digital revenue wasn't enough to offset plummeting sales elsewhere.
  • Yesterday it was Nintendo (NASDAQOTH: NTDOY  ) disappointing investors. It has sold just 3.06 million Wii U units since November's debut, and now expects to move just 4 million units in its fiscal year ending in March. It was originally projecting 5.5 million Wii U consoles. It's not just the freshman system coming up short. Nintendo's scaling back 3DS expectations -- from 17.5 million down to 15 million -- for the year. Naturally, all of this means fewer Nintendo games will be sold.

It's not pretty. Just when you think that the industry has bottomed out after three years of declining sales, the brittle floor cracks, sending confused gamers down to an even lower level.

GameStop (NYSE: GME  ) kicked off this unfortunate month by hosing down its same-store sales guidance for the fourth time over the past year. At least the hardware and software companies could have taken solace in knowing that GameStop is merely a middleman retailer. The chain will continue to fade as the industry reaches gamers directly through digital distribution.

However, EA's top-line weakness and Nintendo slashing its own forecasts suggest that the industry's still in a funk. Whether it's a matter of mainstream gamers settling for social or casual games or folks just losing interest in the genre, don't call bottom until you hear a thud.

EA is in the game
While Activision Blizzard and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. Our new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now and we'll throw in a year of free quarterly updates as news breaks.

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  • Report this Comment On January 31, 2013, at 5:04 PM, TelsaRowe wrote:

    The gaming sector is incredibly strong right now as consolidation over the years (most recently thq's asset liquidation aquisitions) is leading to more stability. Gaming stock PE's are way below the S&P average and priced for volatility. Games are selling very well and the new console push over the next year will help to raise all ships. EA's pps has rocketed on terrible earnings and ttwo's vital GTAV delay caused a very low volume selloff that recovered to the pps it was at a week ago. Video game stocks are not to be avoided and should perform very well in 2013. This article was complete zero forethought trash whose advice should be disregarded.

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