Is the video game sector getting tired? According to a Reuters article, the NPD Group is reporting a 9% year-over-year decline in overall video game hardware and software sales, to approximately $1.3 billion last month. Game sales alone dropped 18%, while hardware sales fell 21% in terms of units sold. (On a gross dollar basis, however, hardware sales jumped approximately 10%.)
So what gives? Well, the video game industry is experiencing some growing pains. Microsoft's (NASDAQ:MSFT) Xbox 360 is one of the most difficult Christmas gifts to land, and it's the launching pad for the new console cycle. Sony's (NYSE:SNE) PlayStation 3 and Nintendo's Revolution hit the retail pipeline in 2006. In this segue period, consumers face a tough choice: Buy now or wait for the upgrade? The shortage of Xbox 360 units, coupled with buyers' general indecision, is most likely driving down the numbers.
So what does that mean for investors? Shareholders in quality publishers such as Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:ERTS), and THQ (NASDAQ:THQI) probably shouldn't worry about these woeful numbers. After all, they're only from a single month. We know that people will be playing video games decades from now, and I'm reasonably sure that the big-brand publishers will still be around in one form or another. You could even argue that exposing your portfolio to this area of consumer spending is a must. (Of course, if you can buy these stocks at lower prices, all the better.)
While I'm a constant bull on the blue-chip publishers, there are risks. Each new system brings technological leaps, making it harder to program for, and contributing to skyrocketing development costs. Just as in the movie business, a series of expensive flops could be an earnings killer for any publisher. It's also possible, however unlikely, that video games could one day fall out of fashion.
For now, don't let those dizzying development costs keep you away from the sector's best companies. Try to buy these great firms on pullbacks, then hold for the long term. Taking advantage of volalitity can become a great strategy for a high-scoring portfolio.
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Microsoft is a Motley Fool Inside Value recommendation. Activision and Electronic Arts are Motley Fool Stock Advisor recommendations.
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Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.
