Video Game Makers With 1 Life Left

These video game makers could quit the game entirely, or be great opportunities for a turnaround.

Mar 19, 2014 at 10:15AM

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The out-of-date losers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.

Game over...continue?
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
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information