How Investors Are Looking at Halo 3 (MSFT, GME, ATVI, TTWO, BBY)

By now, everyone on earth knows of the launch of Halo 3.  Microsoft’s (NASDAQ:MSFT) Bungie Studios is launching this at Midnight tonight.  This should pretty easily surpass the $125 million in first-day sales from the predecessor Halo 2 title.  But Microsoft is too large of a stock to focus on a video game.  The good news for Microsoft is that this is the event that should help the entire Xbox venture a profitable foray for the company.

The Halo 3 retail sellers are where you have to look from the investor side, and that leaves just one pure-play: GameStop.  On August 17 GameStop (NYSE:GME) stock was at a mere $40.00-ish price with many share price closes being $39 to $41 during the market malaise.  But now shares sit at $55.28 as of Friday’s close, and are up another 1.3% pre-market Monday at $56.00.  This represents over a 30% gain, and we all know the major culprit: Halo 3.

The truth is that we saw some bang up numbers out of video game salesfrom NPD and elsewhere for the sector.  That will continue for anothercouple of months.  But after this it is going to be tough to see thestrong comparable sales.  Activision (NASDAQ:ATVI) has its "Guitar Hero3" coming next month and Take-Two Interactive (NASDAQ:TTWO) has the new"Grand Theft Auto" coming in early 2008.

Best Buy (NYSE:BBY) istoo hard to play as a stock merely for games because they sell plasmaand LCD TV’s, PC’s, PDA’s, phones, iPods, appliances, CD’s, and a fewhundred more things.  GameStop will probably surpass expectations andmay even have another stellar quarter or two going into the holidaysand early next year.  But unless the industry has kept major secretsand has many more games and systems coming out, then comparing 2008 to2007 is probably going to be very hard to with much fervor.

Afterseeing the stellar performance of GameStop stock reaching record highs,it won’t be too hard to imagine profit takers in the fold as this playsout.  This industry is very cyclical based on major game titles andconsole launches, and the 2006 to 2007 period will almost certainly endup being a record until the next major gaming upgrade cycle.  The flipside and good news for game publishers is that all the new consolessold and new graphic chips should at least keep demand high for videogame titles for months.  But there are just so many Halo games.

Ifyou want a relative discount on this Halo 3 mega-hit, GameStop has beenoffering a 20% premium on game trade-ins if the credit is used for thislaunch (expires September 30); although there may of course be somelimits there.  You might as well expect that the tech support jobs,universities, and high schools will have highly abnormal absences onTuesday and Wednesday.

• Here was the original Halo 3 coverage of last week.
• August game data from NPD was huge, with Xbox buying way up ahead of this launch.
• Here was the look a couple weeks ahead of the launch.
• These major title launches around each other can create a game title spending vacuum, although that now looks muted compared to the prior comparisons.
• You can read the Gamespot.com review or watch the video review here.

Jon C. Ogg
September 24, 2007

Jon Ogg can be reached at [email protected]; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.