What Gaming Console Company Is the Best Investment?

The transition to the latest generation of video game consoles was awkward, but sales are now picking up speed. We take a close look at where the big three console makers stand in the early going.

Jun 20, 2014 at 10:02AM

The latest report out of NPD shows good news in the video game console market, as retail sales are on the rise big time. The transition to the newest generation of hardware seems to finally be on track.

It took some time, with Microsoft's (NASDAQ:MSFT) market-leading Xbox 360 showing strong software sales through the end of 2013, and many customers seeing little reason to shell out top dollar for its successor, the Xbox One. That's a concern with every transition that is finally fading.

Sony rises
The big winner of this shift so far is Sony (NYSE:SNE), who after losing market share with the PlayStation 3 seems positioned to return to a leadership position with the PlayStation 4. The PlayStation 4 has been outselling the Xbox One by a wide margin every month this year.

Financially, Sony has seen better days, trading near its 52-week low after missing badly twice in a row on earnings. But with shares trading at only about 0.75 times book value there, is a chance for a substantial return once it has weathered this storm.

Mario steps up to save Nintendo again
Nintendo (NASDAQOTH:NTDOY) was crushed by a very poor early adoption rate for its Wii U system. Refusing to follow trends, as usual, the Wii U was panned for its lower performance and unusual video screen controller.

That sentiment looks like it's turning around, and the reason as usual is games. The newly released Mario Kart 8 was not only the second-highest selling retail console game in the latest NPD report, but it also drove a substantial increase in Wii U sales.

Nintendo already has a winner with its handheld 3DS, and with more big Wii U games coming around the holidays, it is time to start talking recovery.

Nintendo's stock is still trading at about a third of the price it saw in 2010-2011, when the Wii U's predecessor was selling like hotcakes. It may not get back to those highs, but with its debt-free balance sheet and trading at a modest 1.26 times book value, there is a lot of room for the stock to go higher. 

Microsoft figures it out
Microsoft is always going to be a player, and even as poorly as the Xbox One was received early on, it's too early to call this console race. The company scored a big exclusive hit with Electronic Arts' Titanfall, and has finally started selling Xbox Ones without the Kinect camera/microphone, answering the long-standing complaints of the privacy-minded. 

Microsoft's big advantage, as always, is financial, as it is sitting on a mountain of $87 billion in cash, and is alone among the big three console makers in being profitable. That means the company can keep pouring money into advertising and buying more exclusive titles, trying to buy future profits with today's. 

The downside is that Microsoft is trading near its 52-week high, and while the Xbox line's relatively small impact on the bottom line means it's tough to invest in Microsoft as a bet on the Xbox One. If you decide to though, you will enjoy a 2.7% dividend yield.

Final foolish thoughts
Microsoft is a big company in a lot of industries other than games, and I'm not a fan of its computer software segment, which seems perennially under pricing pressure from lower cost alternatives. It's a company worth considering, but has limited upside. 

Sony's recent earnings misses are a concern, but the PlayStation brand has driven the company to success in the past, and seems positioned to do so again. Keep a close eye on Sony, because its balance sheet isn't as favorable as the others, but it feels like a good bet for recovery.

Nintendo is ultimately my favorite of the bunch, as it is the most focused of the companies, has a great debt-free balance sheet, and a library of intellectual property that it can wield when trying to drive their sales. A recovery to the heights of a few years ago is a long shot, but there is plenty of upside potential all the same.

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Jason Ditz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. 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.

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