Social Gaming Demise, Huge 2013 Opportunity for Video Game Sector (ZNGA, FB, GME, ATVI, EA)

It is no secret that the traditional video game sector faced several crushing blows all at once. The rise of companies like Zynga Inc. (NASDAQ: ZNGA), Rovio and others came on the backside of a recession and allowed for the game-loving masses to fall back on “freemium” games for their entertainment. The rise of Facebook Inc. (NASDAQ: FB) also contributed to this because if you were spending (or wasting) so much free time looking to see pictures and descriptions of what your friends were having for lunch then you were likely to start playing those types of games.

But things have changed. Zynga’s most recent warning is showing what most market observers will claim was easy to see down the road. Building virtual farms, playing basic mafia characters and having animated animals shoot things at each other was going to have a limited shelf life. Zynga’s shares hit an all-time low after the news. The question still remains about the future of video games. Can the old-school video game sector recover its lost momentum? The answer is likely yes, but the structural challenges are going to be secular rather than cyclical.

GameStop Corp. (NYSE: GME) finds itself at the center of the argument over traditional video games versus freemium and social media games. The download argument also comes into play here. At issue is that GameStop is a video game system story, even if it is trying to get more and more of the download market. So, why does this matter now? After years of the same video game systems, a new set of video game consoles is likely coming over the next year or so. Will gamers line up to pay $59.99 for all new games again? We will find out, but hot titles have sold well even as freemium social games were so popular.

Two video game giants are also in the mix and the opportunity is theirs for the taking. Still, there is no assurance that they will rise to the occasion. We are expecting a new wave of consoles ahead to be the driving force, and the iPad and Android tablets are just not going to be in the same realm of games ahead that new graphics will offer.

Activision Blizzard Inc. (NASDAQ: ATVI) was put together by a merger of Vivendi/Blizzard and Activision, and now there has been what feels like a botched breakup of the empire that it created. This company is worth $12.5 billion, and this stock has been stuck in a trading range of $11 to $13 for most of about three and a half years. Will World of Warcraft rule in the decade ahead, or will other games lead the charge here?

Electronic Arts Inc. (NASDAQ: EA) has been stuck in the mud for so long that one has to wonder if a turnaround can ever fully come into effect here. At $12.90, its 52-week range is $10.77 to $26.13. Even with shares at half of the peak, this is still worth $4.1 billion in market value. It is safe to assume that it is now irrelevant that EA used to be a stock worth more than $50 per share. It is going to take a lot more than sports and Sims (and even a suit against Zynga) to get things back into full swing. Shareholders have to hope that a wave of new games on new consoles in the next year or two will drive the truck here.

A new release of the Halo 4 video game in November may help GameStop, but it is no help at all for EA nor for Activision Blizzard as the game is from Microsoft Corp.’s (NASDAQ: MSFT) Bungie. There is a huge opportunity for the old school video game sector over the next year. Unfortunately, this opportunity comes with no assurance of success.

JON C. OGG