The following is the latest "Game Trader" coverage from Panoptic Management Consultants, a regular exclusive from Asif Khan and Adam Kraus. In their last column, Nintendo shares were upgraded for the first time to "Super Mega Buy." As you can see below, PMC is still very much a believer in Nintendo as a solid investment opportunity.
Changes to Our Ratings
We are upgrading GameStop to Buy from Hold. We are upgrading Zynga to Hold from Don't Buy.
Super Mega Buy
Nintendo - NTDOY
6/23/10 price $37.40
1/22/11 price $34.14
1/31/12 price $16.94
5/31/12 close $14.32
-61.71% return since we initiated coverage at Buy on 6/23/10
-15.46% return since we upgraded the stock to Super Mega Buy on 1/31/12
High since our last report $19.62
Low since our last report $13.74
Nintendo continued to decline at a faster pace than most equities over the past quarter. We even gave them the nickname "Nintenlow" at our PMC offices. With $9/share in net cash and coming off their first fiscal loss in 30 years, we strongly believe that we are past the worst part of the trough in their revenue cycle. Of course, Nintendo must have a strong showing at E3 and follow through with a great Wii U launch later this year to bring any sense of confidence back to the shareholder base. Until we get some certainty regarding the Wii U, the stock will continue to be whipsawed by the bears. This remains our best investment idea in the videogames industry and as a result we are maintaining our super mega buy rating on the stock. The company is trading for book value, which is incredibly rare for entertainment companies with such great brands.
Apple - AAPL
6/23/10 price $270.97
1/22/11 price $326.72
1/31/12 price $456.48
5/31/12 close $577.73
113.21% Gain since we initiated coverage at Buy on 6/23/10
High since our last report $644.00
Low since our last report $455.55
Apple's stock chart went temporarily parabolic and was incredibly overbought on relative strength indicators when it hit a resistance point at $644/share. We still believe Apple offers tremendous upside from here. The stock was used as a funding currency in May as Facebook mania reached its feverish pitch. The stock declined from $644 to $522.18 before its recent rally back to the upper $570s. Clearly we are entering into a volatile period for equities, but Apple's share price has tremendous earnings growth to back it up. It will begin to pay a dividend soon which will have a higher annual yield than the 10 year US Treasury Bond. We don't know what our readers think, but we have more faith in Apple's balance sheet than the US government's.
Electronic Arts - EA
6/23/10 price $15.29
1/22/11 price $15.13
1/31/12 price $18.58
5/31/12 close $13.62
-10.92% return since we initiated coverage at Buy on 6/23/10
High since our last report $20.64
Low since our last report $13.61
The risk reward on EA is certainly very compelling at this point. The stock hasn't traded this low since May of 2000. They currently have a $4.23 billion market cap while sitting on $1.85 billion in cash. They have $539 million in debt, but that still leaves them with over a quarter of the company's value sitting in cash or short term securities. It's also got an incredibly low price to sales ratio of 1.04; a number that has previously been as high as nearly 6. The market has written off companies that they don't view as being a part of the social/cloud future, and they've dumped every good old fashioned gaming company as a part of that trend. Oddly enough, in EA's previous quarter, digital revenue amounted to 30% of total revenue and is growing rapidly. It seems the market didn't get the memo.
GameStop - GME
6/23/10 price $18.89
1/22/11 price $20.90
1/31/12 price $23.36
5/31/12 close $19.18
-17.89% return since we downgraded the stock to a Hold from Buy on 1/31/12.
High since our last report $25.86
Low since our last report $18.13
For the last couple years our general rule of thumb has been to buy Gamestop under $19. It's dropped almost 18 percent since we downgraded it in January. The stock has been vacillating back and forth under $19 for about a week and we think it's now time to upgrade it back to a Buy. Our article is called Game Trader, and sometimes investors have to be tactical with their entry and exit of stocks. GameStop is definitely a battleground stock and investors can expect more volatility to come in shares. GameStop will benefit from the next generation of hardware consoles coming out. With the Wii U coming out later this year there is a compelling draw for consumers to shop and pre-order at GameStop. We think that it is unlikely for the next generation Sony and Microsoft consoles to be download only, or not support used games.
Both of those moves are probably too risky in an economic environment like this one. For game downloads, they also have to take into account the large size of next-gen games and the spreading plague of data caps by internet service providers. Adding to our reasons to upgrade GameStop is it's over 3% dividend yield at an insanely low 5.66 forward P/E. Also, with a 46.68% short interest the stock is just sitting there waiting for a short squeeze on any positive news. With the stock priced this cheaply it doesn't seem like it will take much to get the ball rolling on that front. Sentiment surrounding the company as well as the industry is incredibly negative which makes for an interesting investment entry point for contrarian investors.
Take-Two Interactive - TTWO
6/23/10 price $9.57
1/22/11 price $12.15
1/31/11 price $15.60
5/31/12 close $11.52
-26.15% return since we upgraded the stock to a Buy from Hold on 1/31/12.
High since our last report $16.99
Low since our last report $11.00
Take-Two Interactive is dirt cheap. We constantly debate upgrading it again to Super Mega Buy, but we will wait to see how Max Payne 3 sales numbers are and how strong of a showing the company has at E3. Need we remind you there is a Grand Theft Auto game waiting on the sidelines? We may have been early in upgrading Take-Two to a Buy from Hold, but we believe you want to be long this company ahead of their flagship release of GTA V. The stock has a 16% short interest, trades at 1.25 times sales, and 1.75 times book value. Sales are likely at the bottom of this cycle's trough and by the time investors start to see revenue growth, the shares will have already begun their rally.
Activision - ATVI
6/23/10 price $11.21
1/22/11 price $11.24
1/31/12 price $12.34
5/31/12 close $11.74
4.45% Gain since we downgraded the stock to a Hold from Buy on 1/21/11.
High since our last report $13.01
Low since our last report $11.54
When we downgraded Activision Blizzard to a Hold from a Buy rating we simply didn't see any near term catalysts to drive the stock price higher. The company has also been dragging its feet on entering mobile/social gaming in a bigger way. Activision is sitting on over $3 billion in cash and can easily make an acquisition to spur earnings growth. Management seems fat and happy with shipping the latest Call of Duty titles, but eventually year over year growth in that franchise will slow. Blizzard is always a wild card and the upcoming Bungie title in the pipeline could bring excitement back to this stock. ATVI pays a 1.5% dividend annually, which could definitely grow over time as they increase their payout to compensate for potentially lower earnings growth.
Google - GOOG
1/22/11 price $611.83
1/31/12 price $580.11
5/31/12 close $580.86
0.13% Gain since we downgraded the stock to a Hold from Buy on 1/31/12.
High since our last report $658.59
Low since our last report $579.00
The more we watch Google, the more we feel that they are at risk of being the Microsoft of the next decade. Yes they are a market leader, but they appear to lack the management focus required to continue to grow earnings long term in a meaningful way. They have a number of projects and ideas floating around with no actual earnings to show for it. The stock is virtually unchanged since we downgraded it to a buy, and we believe it may trade in a range between $450/share and $680/share for a considerable time to come. The company is not overvalued, but management does not have the respect of Wall Street. Until we can see a clear vision for the future of the company, we will keep putting our chips with Apple instead of Google.
Microsoft - MSFT
6/23/10 price $25.31
1/22/11 price $28.02
1/31/12 price $29.53
5/31/12 close $29.19
15.33% Gain since we initiated coverage at Hold on 6/23/10
High during the period $32.95
Low during the period $28.64
Microsoft's Xbox division is doing extremely well. They may not have won the console war this round on a unit sales basis, but there is no doubt that the Xbox 360 is the best platform available to hardcore gamers. Sadly, this is still not enough to get us to upgrade MSFT to a buy. It is a great long term hold with a 2.7% dividend yield, loads of cash, and a dominant operating system. We also like what they are doing with Xbox Live content deals. It is clear that Xbox will be the key to Microsoft's battle for couch time going forward and investors could do a lot worse than owning the stock.
Sony - SNE
6/23/10 price $27.74
1/22/11 price $34.22
1/31/12 price $18.22
5/31/12 close $13.24
-27.33% return since we upgraded the stock to a Hold from Don't Buy on 1/31/12.
High since our last report $22.35
Low since our last report $12.97
Perhaps we were too quick to upgrade Sony to a Hold. We still feel the company is surprisingly inexpensive. There aren't many companies that are trading at nearly 50 percent of their book value. However, at the same time, the stock chart is completely broken and we now have no idea where it may end up. If it goes much lower we'd almost feel compelled to upgrade it to a Buy, but we need to see some signs of a turnaround in the stock and the company before we do. Sony's problems are more than skin deep. Sony needs a major restructuring which could take years to complete. Sony is nowhere near the juggernaut they once were. We can think of no sector where they are the current market leader. Adding to their problems is the continuing yen strength, which is a curse to a company that derives most of its revenues from outside of Japan. We still think Sony has a chance to turn it around, but we don't see it happening anytime soon.
Zynga - ZNGA
1/31/12 price $10.49
5/31/12 close $6.26
-40.32% return since we initiated coverage at Don't Buy on 6/23/10
High since our last report $15.91
Low since our last report $5.81
We may have been early on our Don't Buy call for Zynga as the stock rallied 51.66 percent to $15.91 before collapsing below $6.00 just recently. We would rather be early than wrong, and you could have missed Zynga's massive decline if you read our Game Trader articles. Now trading around $6/share, we think most of the premium is out of the stock. Trading at a $4.4 billion market cap with $1 billion in cash, the stock is starting to look compelling from a trader's perspective. Zynga's forward P/E of 16 is no longer at a huge premium to its long term earnings growth rate. Much of Zynga's decline has to do with the failure of the Facebook IPO. Many investors question Facebook's plans for monetization, but we don't feel that it is fair to lump Zynga into those problems. We believe investors who didn't listen to our Don't Buy recommendation above $10/share should hold onto the shares here as we think the stock could either rally back to double digits or at least find its footing down here at the $6/share level.
The Don't Buys
THQ - THQI
6/23/10 price $4.68
1/22/11 price $5.61
1/31/12 close $0.67
5/31/12 close $0.66
-85.90% return since we initiated coverage at Don't Buy on 6/23/10
High since our last report $0.79
Low since our last report $0.45
We don't want to kick management while they are down, but THQI's performance as a stock has been atrocious. They are planning a reverse stock split to get the stock back above $1.00/share by July 23. This should not inspire confidence from shareholders, because the company clearly doesn't think the stock could rally back above $1.00/share on its own merits.
The company has a market capitalization below $50 million and $100 million of debt. A better trade/investment may be to buy the THQ convertible bonds which are trading at 50 cents on the dollar. Their CUSIP is 872443AB2. Those bonds are paying a 10% interest rate right now, but we are not entirely sure if THQ will even be able to pay off their debt at their current cash burn rate. Bottom line, do not buy these shares! If you want to make a speculative bet on THQ surviving, check out their convertible bonds.
Investors should do their own research or consult their advisor before acting on this information. Panoptic Management Consultants, Inc. is a Registered Investment Advisor that was founded in 2008. Please go to our website www.panopticinvesting.com for more information about fundamental investing as well as technical analysis. For prospective client inquiries please contact us at firstname.lastname@example.org.
Full Disclosure: At the time of this article our CEO, Asif A. Khan, CPA, his family members and/or Virtue LLC had the following positions: Long Apple, Long Electronic Arts, Long Facebook, Long GameStop, Long Microsoft, Long Nintendo, Long Take-Two Interactive, Long Zynga (through call options)
At the time of this article our COO, Adam H. Kraus, JD, MBA, had the following positions: Long Apple, Long Nintendo
At the time of this article, clients of Panoptic Management Consultants Inc. had the following positions: Long Apple, Long Electronic Arts, Long Facebook, Long Google, Long GameStop, Long Nintendo