If you believe the hype, the players in the video game industry have either infinite lives or just one mistake left to a 'game over.' In this industry, companies take turns in first, and those that seem to have a grip on the latest trend win investor interest. It's an industry where short-termism is rampant, from console to console and title to title.
And because of this short-term thinking, it's an industry that can reward long-term investors who play against such hype. To help get you started in identifying such opportunities, here's an overview of the companies that are losing in the real world of business.
Check out the companion article for those companies that are on winning streaks.
The out-of-date losers
With mobile phones and tablets taking over all sorts of devices and computing, it's no surprise that the traditional console makers are bearing the brunt of this industry shake-up. While pure game developers can shift assets more easily to accommodate the growing mobile market, the less nimble manufacturers have at least one foot back in the days before tapping screens was popular.
Nintendo (NASDAQOTH:NTDOY), for example, suffers from the company's weak release of the Wii U console. Its stock is down 80% since its 2007 peak. And even with Nintendo's storied 100-plus year history and roughly $9 billion in cash and short-term securities, its market value sits at only around $16.5 billion.
Pessimism abounds as the company cut its forecasted Wii U sales from 9 million units to only 2.8 million for the past year ending this month. And its complementary software sales forecast also took a hit, with 38 million games sold to only 19 million. With these cuts, the company expects to lose $339 million in fiscal 2013.
But there are reasons for optimism at Nintendo. Its stockpile of cash means that the company has at least a few more shots to develop a winning strategy. And the culture at Nintendo is focused on the long-term and on shareholder value, evidenced by CEO Satoru Iwata's self-imposed 50% salary cut for the next five months. It also owns an incomparable brand, with classic characters like Mario, which Interbrand values above $6 billion.
While other companies might clamp down on spending during such a rough patch, putting them in a death spiral until bankruptcy, Nintendo is not afraid to deploy its resources. This is evidenced by its research and development costs for this fourth quarter, estimated to be 80% higher than the same period last year. As Iwata states: "...we decided to increase our forecasted expenses this fiscal year in order to tackle some of the areas that we feel we are not strong at, and this is an investment toward the future. I will not, however, go into detail about these specific areas since doing so does not benefit Nintendo or our shareholders."
The other Japanese company with slightly less nimble capabilities, Sony (NYSE:SNE), has surpassed sales expectations for its latest console, PlayStation 4, with over 6 million units sold. However, its failure to accurately forecast demand has left some potential customers without the console. The head of PlayStation UK says supply there will only become regularly available in April. And if customers can't buy a PlayStation, they could easily turn to a competitor's product.
Even with this strong demand, Sony's stock is down 20% over the past six months due to major restructuring, which will push it to a forecasted $1.1 billion loss this fiscal year. These changes include selling its VAIO computer business, and spinning off its television set segment into a subsidiary. It's also cutting 5,000 jobs over the next year.
But the company had $15 billion in cash and marketable securities on its December balance sheet, meaning it still has plenty of maneuverability, even with Moody's recently cutting its credit rating to junk. If Sony can right its shaky ship by dumping the ballast of poor performing segments, it still has well-performing segments that could pique investor interest.
The cyclicality of the gaming industry is driven by the latest hot consoles and titles. Nintendo had a misstep with the Wii U, but also has the resources to play again. Sony has a strong performer with PlayStation 4, but must shed its excess stale businesses. If the companies achieve their goals, either could make a great investment -- but only over the long-term.
For gaming companies that have just scored fantastic wins, check out the recent winners.
One other contrarian investing idea
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Dan Newman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.