Piper Jaffray
Video Game Sector Thesis For 2004
KEY POINTS:
BELOW WE OUTLINE OUR SECTOR THESIS AS WE HAVE
PUBLISHED DURING THE LAST TWO MONTHS:
CURRENT TOP PICK: Take-Two Interactive (TTWO)
POTENTIAL SECTOR CATALYSTS FOR 2004:
1.) Publisher valuations have become attractive.
2.) NPD Comps get easy in Q1 (Jan +0.8%; Feb -4.6%; March +8.2%).
3.) Hardware price cuts will be early (March/April) and deep ($129).
4.) E3 Trade show (May) provides visibility, awareness, and hype to group.
5.) Sony PSP launch (holiday 2004) will provide psychological lift to group 2H04.
6.) Nintendo's dual-screen handheld video game platform launch in late 2004.
7.) Seasonality winds will change in early-mid 2004.
SECTOR THESIS FOR 2004:
1.) HW Unit sales will be flat to 2003 assuming price cut to $129 on PS2/Xbox.
2.) SW Sales growth is estimated at 6%-10%, assuming $129 HW price point.
3.) Software pricing is expected to decline by 15% during CY04.
4.) PSP Platform is at significant risk in terms of timing, price, and target market.
5.) Used video game sales will drive big opportunity for specialty retailers.
6.)Xbox 2.0 hardware launch likely in late 2005 and PS3 likely in 2006.
7.) Publishers will experience upward R&D cost pressure during 2H04.
8.) Publisher OCF and ROIC will remain strong and healthy.
9.) Publishers will be overly optimistic regarding GEN-5 growth.
10.) On-line gaming will gain traction, but remain modest in terms of profits.
11.) Estimated growth during next video game cycle (PS3/X-Box 2.0) only 6-10%.
12.) Mergers and acquisitions will be few (if any) among public game publishers.
PRIMARY RISKS TO THESIS:
1.) Video game pricing remains a significant risk factor.
2.) Upward R&D and advertising cost pressure in late 2004.
3.) Late cycle psychology could drive investors away from group.
4.) Dependence on key management.
5.) Companies' ability to acquire and build high-profile intellectual properties.
6.) PSP Platform falls materially short of expectations.
Video Game Sector Thesis For 2004
KEY POINTS:
BELOW WE OUTLINE OUR SECTOR THESIS AS WE HAVE
PUBLISHED DURING THE LAST TWO MONTHS:
CURRENT TOP PICK: Take-Two Interactive (TTWO)
POTENTIAL SECTOR CATALYSTS FOR 2004:
1.) Publisher valuations have become attractive.
2.) NPD Comps get easy in Q1 (Jan +0.8%; Feb -4.6%; March +8.2%).
3.) Hardware price cuts will be early (March/April) and deep ($129).
4.) E3 Trade show (May) provides visibility, awareness, and hype to group.
5.) Sony PSP launch (holiday 2004) will provide psychological lift to group 2H04.
6.) Nintendo's dual-screen handheld video game platform launch in late 2004.
7.) Seasonality winds will change in early-mid 2004.
SECTOR THESIS FOR 2004:
1.) HW Unit sales will be flat to 2003 assuming price cut to $129 on PS2/Xbox.
2.) SW Sales growth is estimated at 6%-10%, assuming $129 HW price point.
3.) Software pricing is expected to decline by 15% during CY04.
4.) PSP Platform is at significant risk in terms of timing, price, and target market.
5.) Used video game sales will drive big opportunity for specialty retailers.
6.)Xbox 2.0 hardware launch likely in late 2005 and PS3 likely in 2006.
7.) Publishers will experience upward R&D cost pressure during 2H04.
8.) Publisher OCF and ROIC will remain strong and healthy.
9.) Publishers will be overly optimistic regarding GEN-5 growth.
10.) On-line gaming will gain traction, but remain modest in terms of profits.
11.) Estimated growth during next video game cycle (PS3/X-Box 2.0) only 6-10%.
12.) Mergers and acquisitions will be few (if any) among public game publishers.
PRIMARY RISKS TO THESIS:
1.) Video game pricing remains a significant risk factor.
2.) Upward R&D and advertising cost pressure in late 2004.
3.) Late cycle psychology could drive investors away from group.
4.) Dependence on key management.
5.) Companies' ability to acquire and build high-profile intellectual properties.
6.) PSP Platform falls materially short of expectations.
