2008 Entertainment Software Sector Outlook Is Neutral

Analyst Jim Yin over at Business Week is predicting a neutral outlook on home entertainment software for 2008. Common sense would tell me that gaming is going to be a hot investment in 2008, but I’m certainly no expert. A majority of their outlook was based on the popularity of the Nintendo Wii. He predicted sales to continue and console prices to drop. Although he mentioned Nintendo Wii production will increase in 2008, I find it hard to believe that developers will invest any considerable advantage over to the system. Until consoles can keep up with demand, there’s going to be a ton of games sitting on shelves and no consoles in sight. I also believe that the PS3 and Sony have been overlooked by stock insiders for 2008. I have always predicted that 2008 will be the year of the PS3 and it will not be long before we find out. Nintendo was under-valued going into 2007 and perhaps they are over-valuing it now.

Stronger sales and a larger installed base of game consoles should bode well for video game developers, as consumers purchase as many as 9 to 15 titles per console. Additionally, we expect video game developers to release more titles that take advantage of the new consoles’ better graphics and improved playability. In particular, we think developers underestimated the popularity of Wii and have not developed as many titles for this console system as for others. However, they have allocated more resources and plan to release more video games for Wii.

Although we believe fundamentals will improve in 2008, we do not have a positive fundamental outlook for this sector, primarily due to valuations. We have a hold recommendation on Activision (ATVI; $27), THQ (THQI; $28), and Take-Two Interactive (TTWO; $19), and a sell opinion on Electronic Arts (ERTS; $59).

Via WDSU.com