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In Video-Game Sector, Now May Be the Time to Score

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This month -- just like in 2007 -- numbers will rock. Here's why.

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NPD reported that US video-game sales fell 19% in October as the industry suffered from tough comps and consumers pulled back from discretionary buys. It's not actually news, since we've recently seen mixed earnings results from the likes of Activision (ATVI), Electronic Arts (ERTS), THQ (THQI), and Nintendo.

The question is, when will things really come back?

My last, best, and 100% wrong guess was September, when titles like The Beatles: Rock Band and Guitar Hero 5 ended up disappointing (see Why It May Not Be Game-Over for GameStop.) The industry is now looking at November as the month when the numbers will really rock again, and for good reason -- it's a carbon copy of November 2007, a blockbuster month that saw 74% growth in software sales.

The top three selling games of November 2007 were Call of Duty: Modern Warfare, Super Mario Galaxy, and Assassin's Creed.

And what are the most likely top-selling games of November 2009? Call of Duty: Modern Warfare 2, New Super Mario Bros Wii, and Assassin's Creed 2.

Coincidence? Not really. Big franchises are typically on a two-year sequel schedule, so we're seeing a fairly strong software cycle battle a lousy economy.

Modern Warfare 2 certainly hasn't disappointed, generating $310 million in US and UK sales in its first 24 hours -- more than enough to make it the biggest entertainment opening of all time. The only question is, will MW2's enormous replay value stop people from buying other games? Microsoft (MSFT) announced that MW2 broke an Xbox Live record by having 2 million people playing online simultaneously -- and I'm sure the PS3 (SNE) version is seeing similar activity levels.

The strength of MW2 could thus impact Assassin's Creed 2, not to mention the fact that hardware sales remain challenged despite recent console price cuts. The saving grace may be mainstream retailers getting more aggressive with using video games as doorbuster Black Friday deals, effectively subsidizing software publishers in order to get people in the door. But who wants to bet on that? Sorry, too many crosscurrents for this guy.

As far as the stocks go, I only want to bet on two things: blockbuster games, or extremes in valuation. Thus I'm still favoring Activision and Take-Two Interactive (TTWO), particularly the latter for its absurdly cheap valuation and upcoming product cycle (see Take-Two Enters New Peak Product Cycle.) I recently dumped my losing THQ position as part of my year-end tax planning, but will be adding it back once I'm around the wash-sale requirements. Electronic Arts should be avoided because of its premium valuation, muddled corporate strategy (see Activision Is Racking Up Points), and ongoing decline in earnings power.
Positions in ATVI, TTWO
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