This holiday shopping season the video game industry will see new consoles making a splash, big games from hugely popular franchises and one surprise hit PC game possibly making the leap to living-room consoles.
NPD Group analyst Mat Piscatella says game sales will see a nice rebound from last year's disappointing numbers, owing to several hot titles and new consoles. EA is counting on "Star Wars Battlefront 2" to be a hit. Microsoft 's ( MSFT ) Xbox business could get a lift from "PlayerUnknown's Battlegrounds," a surprise smash on PCs, but coming soon to the Xbox One.
"It's going to be a very good holiday for the video game industry," Piscatella predicted.
IBD's Computer Software-Video Games industry group includes 13 stocks. It's ranked No. 1 out of 197 industry groups in terms of stock market performance. The group is up 78% year to date.
Activision, EA and Take-Two have seen their shares rise sharply this year, up 76%, 48% and 104%, respectively vs. the Nasdaq's 20% gain as of Thursday.
Video game publisher stocks have been driven by the shift to higher-margin digital distribution, including monetization opportunities from downloadable content. Another driver has been microtransactions - in-game purchases of digital extras that enhance gameplay, such as characters, clothing, weapons and other items.
In the long term, video game makers also aim to grow revenue from esports - professional video game competitions.
A successful holiday season isn't a sure thing. The big publishers still face hurdles, as do console makers Microsoft, Nintendo ( NTDOY ) and Sony (SNE).
IBD'S TAKE:Electronic Arts is currently ranked No. 30 on the IBD 50 list of top-performing growth stocks.
Perhaps the biggest unanswered question is whether Nintendo can build enough Switch consoles to meet higher-than-expected consumer demand. The $299 device has been supply-constrained since its March 3 launch.
Nintendo expects to sell 10 million units of the Switch in its first year. As of June 30, it had sold 4.7 million units worldwide, despite routinely being out of stock in stores.
"What's going to drive Switch sales is people being able to find them," Piscatella said.
Switch production has been slowed by component shortages as it competes with smartphones for parts like memory chips and LCD displays.
The Switch can be played like a traditional television gaming console, but has a detachable tablet screen so the same games can be played on the go.
Hot games for the device so far have included "The Legend of Zelda: Breath of the Wild" and "Mario Kart 8 Deluxe," both from Nintendo. Up next is its highly anticipated "Super Mario Odyssey," set to hit stores on Oct. 27, which could further fuel Switch sales.
The current generation of game consoles has been led by Sony's PlayStation 4, followed by Microsoft's Xbox One. PS4 has sold 63.3 million units as of June 30, compared with about 30 million units for Xbox One.
Microsoft hopes to give its console a boost with the release of a high-end version, the Xbox One X, with improved graphics for 4K ultrahigh-definition televisions. It's due out Nov. 7 for $499.
One wild card that could boost Xbox One console sales this holiday season is the expected debut of hit PC game "PlayerUnknown's Battlegrounds," which will be exclusive to Microsoft's gaming consoles. It doesn't have an official Xbox release date yet.
"Battlegrounds" is a multiplayer online battle-royal video game developed by small studio Bluehole. In the game, up to 100 players parachute onto an island and fight to the death until there is one player left standing.
"Battlegrounds" has sold over 10 million copies so far. It has broken the record for concurrent-player count on online gaming platform Steam. In August, it dethroned Tencent Holding 's (TCEHY) "League of Legends" to become the No. 1 most-watched game on Amazon.com (AMZN)-owned Twitch.
"'PlayerUnknown's Battlegrounds' is an absolute wonder," Piscatella said. "I don't recall anything quite like it in terms of the game sales being so exponential."
KeyBanc Capital Markets analyst Evan Wingren concurs.
"Any time a game sells 10 million copies without any large marketing dollars, on one platform alone, and then you see the viewership on Twitch and the number of people playing it on Steam at any one time, that's an impactful title," Wingren said.
The holiday season is poised for several big game releases from the major publishers. They're all new games in established franchises.
Activision has sci-fi shooter game "Destiny 2," released on Sept. 6, and historical shooter game "Call of Duty: WWII," due out Nov. 3.
EA has big expectations for "Star Wars Battlefront 2," especially with a new "Star Wars" movie from WaltDisney (DIS) coming out on Dec. 15. "Battlefront 2" is set for release on Nov. 17.
Take-Two is looking for a slam dunk with pro basketball game "NBA 2K18," released Sept. 19.
Ubisoft hopes to capture its share of the market with "Assassin's Creed Origins," due out Oct. 27.
Competition is expected to be less intense in the software sector this holiday season because Take-Two delayed the release of its Western action game "Red Dead Redemption 2" to the spring from the fourth quarter.
"With 'Red Dead' being pushed out to the spring, it probably helps some of these other titles, because that is definitely going to be a title that can steal some market share from other games," Piper Jaffray analyst Michael Olson said. "That's a positive for 'Call of Duty' and 'Star Wars' during the holiday time-frame."
The lighter release slate for AAA games - big-budget titles that large publishers throw their full marketing muscle behind - has been a trend for the last several years. Publishers have shifted to fewer games with longer life spans, thanks to continual refreshes with digital content updates and online services.
"In general, each year we're seeing more concentration around fewer titles," Olson said. "That's resulting in more (unit) sales per title in some cases. But if not that, then more spend on digital content per title."
The extended life cycle of video games is leading to evergreen titles continuing to sell well like Take-Two's "Grand Theft Auto 5," which came out four years ago, and Activision's "Call of Duty: Black Ops 3," which came out nearly two years ago.
With fewer new game releases, the pressure is on publishers to make higher quality, blockbuster titles.
The latest "Call of Duty" and "Star Wars" console games follow poorly received prior versions. Early indications are that "Call of Duty: WWII" is a major improvement over last year's "Call of Duty: Infinite Warfare" and that "Star Wars Battlefront 2" addresses the gripes players had with the 2015 edition of the series.
"Publishers are going for longer tails and service-based games, and games that last for two years rather than two or three months," Piscatella said.
Publishers also are looking to extend the life of their games by adding esports to the mix. Esports present revenue opportunities for game publishers such as team licensing fees, advertising, sponsorships and broadcast rights.
Activision plans to start its Overwatch League on Dec. 6 with preseason matches. "Overwatch" is a team-based science-fiction fantasy online shooter game.
"It will be interesting to see how that plays out," Olson said. "It will be an early read on how esports in general will be accepted in the U.S. market."
Tencent-owned Riot Games is expected to start selling team franchises for "League of Legends" in November.
Piper Jaffray predicts that video game software will disappear from retail store shelves in about six years. This year, about 40% of console video games will be purchased as digital downloads. Piper Jaffray expects 100% of console video games to be purchased as digital downloads around 2023.
By selling directly to consumers, publishers skip the retail middlemen and pocket higher profit margins. And with digital sales, they don't have to pay for manufacturing, packaging and shipping costs associated with physical media.