Stock Ticker: 2011 In Review

Speaking of fundamental weakness, though, there is one other stock on this side of the Atlantic worth a look - the UK's GAME Group, which we discussed in a Stock Ticker piece relatively recently. Let's turn to retailers, then, and have a brief look at how GAME and its US rival GameStop ended out 2011.

The division here is as clear as it was in the US publisher graph we were looking at a moment ago, and the message is the same. GameStop faces much the same challenges in the marketplace that GAME does, but investors are confident that GameStop has the scale necessary to overcome those challenges. GAME, on the other hand, is simply too small and too unambitious for any outcome other than being completely steamrollered by market changes.

GAME is simply too small and too unambitious for any outcome other than being completely steamrollered by market changes

Is the confidence in GameStop well-placed? Probably not. The company continues to hold a powerful position in US specialist retail, and it's doing a lot better than GAME in that it's demonstrating a willingness to engage with digital distribution channels and trying to integrate them with its business. Nothing GameStop has done so far has really looked like an escape route for a bricks-and-mortar business faced with a steady decline in physical product sales - and ideas like the mooted GameStop-backed, Android-powered gaming tablet device are flatly ridiculous, revealing the extent to which GameStop is thrashing around looking for a lifeline. I give it another couple of years before its graph starts to look a lot more like GAME's did in 2011.

I promised earlier on that I'd return to the question of Sony and Nintendo, and how they look in the context of the Japanese market as a whole. The Japanese stock market is interesting from a gaming perspective because there are a lot more large games companies listed there than there are on western markets. Here's how that sector fared in 2011:

The black line there, once again, is the NI225 index of the top 225 Japanese stocks, so as you can see, it hasn't been a bad year at all to be a Japanese publisher. Not all of these stocks are born equal, of course - it's worth noting that Sega Sammy is a much, much larger company than top-performer Capcom, which is the smallest of the firms listed here. Sega Sammy also has widespread interests outside the games business - specifically, it's heavily invested in the pachinko business in Japan, a business that involves a lot of property ownership in high-value town centre areas as well as being fundamentally linked to the economic fortunes of Japanese households to a much greater extent than the console software business. The take-away is that Sega Sammy is arguably far more exposed to the downside of events like last year's tragic earthquake and tsunami, which goes some way to explaining its near-flat performance last year.

After recovering from the earthquake's financial impact, every Japanese third-party publisher outperformed the Nikkei

Square Enix is a rather different case, and its weak performance relative to the rest of the sector is a consequence of multiple factors. Investors aren't entirely confident in the company's strategy, and concerns over its ability to effectively manage the scale of modern game development have been compounded by immense delays to key console titles. More important this year, however, was the exchange rate; especially since the acquisition of Eidos, Square Enix is arguably the Japanese publisher with the heaviest overseas presence and investment, and the ludicrously strong Yen has steadily devalued those investments on the firm's balance sheet over the past 24 months. This factor impacted every Japanese company to a certain extent last year, but Square Enix more than most.

The point remains, however, that the Japanese industry did pretty well in 2011. No company displayed any serious decline in its stock price, and after recovering from the earthquake's financial impact, every Japanese third-party publisher outperformed the Nikkei. The next time you hear about the Japanese games industry being in crisis, that's worth bearing in mind.

Of course, there were companies that underperformed the Nikkei - because that graph isn't complete until we add in the platform holders. Sony's status as a publisher is somewhat mid-range - it does publish some big games in Japan but its market share of software isn't all that large. Nintendo, on the other hand, is by far the biggest publisher of game software in Japan, and would be the largest company in that industry even if you stripped away its hardware business.

All of which makes it a bit worrying, at first glance, that Nintendo's performance is so awful compared to the rest of the Japanese industry, but there are two factors to consider here. The first is that Nintendo's actual software performance was as good as ever in 2011, and that these figures also don't really take into account the remarkable turnaround in the fortunes of the 3DS towards the end of the year. It will be interesting to return to Nintendo in a few months and see how the stock market has assimilated that data point.

The second factor is that Nintendo's stock is still on a decline from the ridiculous highs of 2007, when it was the most valuable company on the Japanese stock market for a short time. The Wii was a fantastic product that sold amazingly well, and the DS did even better, but neither of those things justified the investor excitement that drove Nintendo's stock to be valued at a level comparable to the world's largest car manufacturer, Toyota. It's worth noting that Nintendo is still the most valuable games company on the Japanese market, and that includes Sony. The stock price has declined, but it would be wrong to see this as a crash or a total loss of faith in Nintendo - it's a correction to a more reasonable price level. A dramatic correction, but a correction nonetheless.

Finally, let's take a brief look at Japan's emerging mobile gaming giants, DeNA and Gree. I wrote about these companies only a few weeks ago, but something I didn't do at that point was put them in the context of the rest of the Japanese games business. The very first graph in this article showed Apple in contrast to the more traditionally rooted games platform holders, so I'm effectively circling back to the same argument by showing how the burgeoning mobile sector has been valued compared to the conventional software sector in Japan over the same period.

There isn't a whole lot to say about this, but it's a striking graph. GREE was by far the top performer in the gaming sector in Japan in 2011, growing its valuation by over 150per cent. DeNA, for its part, declined heavily in the last few months of the year - I've discussed the reasons for that before, but the basic message is that investors are worried that the company's growth has flatlined and isn't convinced by its overseas expansion strategy. GREE, on the other hand, is approaching the overseas market aggressively. 2012 looks like being the year in which it really breaks out in the west.

That's it for our round-up of 2011's stock movements. Stick with us through 2012 as we'll be looking in more depth at some of the stocks discussed in this feature, as well as looking at the early performance of some of 2011's headline IPOs, such as Zynga.