Two Picks as Videogame Sales Show Strength

Sterne Agee rates both GameStop and Electronic Arts at Buy.

WE BELIEVE OUR CHANNEL CHECKS [trend research] bode well for the videogame industry overall but particularly for GameStop (ticker: GME) (rated at Buy) and Electronic Arts (ERTS) (rated at Buy).

Shares of GameStop should benefit from recent industry strength in software (new and catalog) as well as hardware. Electronic Arts shares should benefit from what appears to be a nice rebound in sales of Madden [annually updated football game] as well as solid trends in Need for Speed: Shift.

We believe videogame software sales in the month of September will likely be at the upper end of our expectation of up 5%-10% (versus down 6% last year) with some chance for upside.

We believe the recent hardware price cuts are helping new releases as well as catalog sales. We believe sales of Madden NFL 2010 have picked up meaningfully and sales of key new releases for September such as Halo: ODST ( Microsoft (MSFT)), Need for Speed: Shift (ERTS), Marvel Ultimate Alliance 2 ( Activision (ATVI)) and Scribblenauts ( Time Warner (TWX) unit Warner Bros.) are tracking ahead of expectations. We believe Guitar Hero 5, while down significantly versus last year, is meeting expectations while Rock Band Beatles, also down significantly, is slightly behind.

We believe sales of Electronic Arts' Madden NFL 2010 have rebounded meaningfully in the month of September. Combining August and September, we believe sales of Madden are now down an estimated 5%-10% after being down 19% in August.

Last year, Need for Speed: Undercover was released in mid-November whereas this year's title, Need for Speed: Shift, was released in September, i.e., it did not benefit from holiday shopping like last year. Still, our checks show sell-through is tracking flattish year over year so far. We attribute this to strong ratings for this year's title and recent hardware price cuts. The Xbox 360 and [ Sony (SNE)] PlayStation 3 versions of the title garnered ratings of about 84% this year versus 64% last year. Based on current trends, we believe the full-year sales for this title could be up 10%-20% year over year. For perspective, Electronic Arts sold 5.2 million units of Need for Speed: Undercover last year (down 7% year over year).

We believe PS3 hardware sales continue to be strong following the late August/early September price cut of $100. We believe PS3 hardware sales for September could be up as much as 75% year over year. Our checks show strong demand continues. Equally important, availability (supply) also appears to be solid with 100% of the stores we checked indicating availability and in most cases, pretty good availability. We note Sony had indicated potential for shortages in the PS3 earlier. We believe if current strength continues, we could see shortages by Christmas.

Not surprisingly, [Nintendo] Wii Hardware sales have picked up nicely since the price cut. Although it's only been a couple of days since the $50 price cut on Wii went into effect on Sunday, Sept. 27, the early feedback suggests a nice pickup in sales. That said, we don't anticipate Wii hardware sales picking up à la the PS3.

We believe software sales for calendar fourth quarter will likely be up mid-single digits. Within that, we expect October sales to be down 20% (versus tough comparison of up 35%) followed by mid- to high-single-digit increases in the all-important months of November and December. We note that October software sales represent only about 12%-14% of the quarter while November/December combined represent the balance of 86%.

According to a news source, Movie Gallery plans to close about 200 of its about 680 Game Crazy stores. We estimate Game Crazy has a small (1%-2%) market share in the videogame industry. Game Crazy also offers used videogames. A disruption at Game Crazy is conceivably a slight positive for GameStop.

-- Arvind Bhatia
-- Luke Shagets

http://online.barrons.com/article/SB125434562263853747.html

"We believe PS3 hardware sales for September could be up as much as 75% year over year"

hUH, ONLY 75%? i RECOGNIZE THAT FROM SOMEWHERE

Theyre very rong. Its gonna be a lot higher than 75%. NPD USA +450,000 Slims September.

PS3 beat 360 and Wii in September says Pachter

Only 60,000 units separate all three platforms.

Wedbush Morgan analyst Michael Pachter has published his September video game sales preview for the US market, predicting a strong month for the PS3.

Pachter estimates PS3 console sales of 410,000 units, a 76 per cent increase year-over-year. This should be enough to topple both the Wii (390,000 units) and Microsoft's Xbox 360 (350,000 units).

"We believe that the recent round of price cuts may benefit the PS3 the most in coming months, given that unit sales last year were only 1.5 million for the September – December 2008 period. The Xbox 360 has outsold the PS3 for the past 13 months, likely due to a higher perceived value proposition," explained Pachter.

He added: "We think that the PS3 will outsell the Xbox 360 in September, and may continue to do so for the rest of the year. Microsoft has the ability to lower price yet again, but we anticipate the introduction of a more feature-packed Xbox 360 in early 2010 (likely with a 250Gb hard drive) at the same $299 price point; we think that Microsoft will cut price only if it begins to lose significant market share to Sony."

Final figures from the NPD Group are expected on October 15.

http://www.videogamer.com/news/ps3_beat_360_and_wii_in_september_says_pachter.html