My boys are pestering the heck out of me to buy them the new Sony PlayStation 3 (PS3) videogame system, which made its North American debut last week.
In case you missed it, the PS3 and Nintendo’s rival system – the Wii (pronounced “weâ€) – both hit store shelves in the last week. And video-gamers have been voraciously snapping them up.
The PS3 sold out in a matter of hours, with many eager buyers camping out in the freezing cold to get their hands on one of the scarce systems.
Denver, which is none too warm this time of year, had a whole tent city crop up three days before the consoles went on sale. Other cities had even more desperate gamers:
- In Sullivan, Indiana, a man was in critical condition from a stab wound after he tried to rob two men (who had waited in line for 36 hours) of their consoles.
- One gamer was beaten and robbed of his new PlayStation just minutes after he bought it in Manchester, Connecticut.
- And in Tysons Corner, Virginia, police fired pepper spray into a crowd of 200 people who rushed the doors of a Circuit City as the doors opened.
Some eager gamers took a more legal route to get their systems by paying huge premiums. According to eBay, there were 500 closed PS3 auctions with an average selling price of $2,700. The retail price of the PS3 is $600!
Frankly, I’m not surprised at the hype because it’s part of a larger trend. First, I’ll tell you the trend, then I’ll tell you two ways to go about investing in it …
Going Ga-Ga for Gaming
Systems and Other Gadgets
The PS3 is an amazing piece of technology. Electronics industry research firm iSuppli describes the PS3 as “an engineering masterpiece,†and says, “The PlayStation 3 offers the performance of a supercomputer at the price of an entry-level PC.â€
I have to agree. When you combine a PS3 with a high-definition TV, the PS3’s graphics are so clear that you can see beads of sweat rolling down characters’ faces in the game.
Nintendo’s system is equally impressive. And it generated a similar I-gotta-have-it enthusiasm. For example, at the Toys ‘R’ Us store in Manhattan, a line of more than 1,000 gamers snaked around the block.
The Wii is a big hit because of its innovative one-handed, motion-sensitive controller, which lets users simulate fishing, punching, playing tennis, or shooting a bow and arrow.
As my 8th grade son, Kenji, excitedly pointed out to me, the Wii is about half the price of a PS3. “Good,†I told him. “You’ll only have to work at our family store for 50 hours to earn enough money to buy one yourself.â€
Amid all the videogame hype, another gadget launch got slightly less attention: Microsoft unveiled its new music, movie and photo player, called the Zune.
Now, in my opinion, anybody who thinks the Zune will dethrone Apple’s iPod is delirious. Sure, Microsoft may sell a couple million Zunes, but the iPod will stay at the top of the heap for years to come.
Why? Because there are lots of handheld music players on the market, but nobody else has one that’s integrated into our everyday lives like Apple’s iPod.
For instance, when I’m in Hong Kong, I often stay at Lanham Place. The hotel has clock radios that allow you to plug in your iPod and listen to it. If that’s not proof of the iPod’s single-handed market dominance, I don’t know what is.
A Lesson for Doodad Investors:
Stick with Proven Winners
It’s clear that electronic gadgets like entertainment systems are a major market. But if you’re looking to capitalize on the next big winner, you shouldn’t always bother looking for some new, undiscovered play. Often times, the big winner is already staring you in the face.
Apple is hardly an undiscovered stock, but the company’s business is flat out booming. It reported its third-quarter results last month, and they were spectacular. Quarterly sales increased 32% to $4.84 billion while profits jumped 27% to $0.62 a share!
That’s no surprise because iPod players were flying off the shelves. Apple shipped 8.73 million players, 35% more than a year earlier. And as far as I can tell, the iPod product line’s popularity will continue.
Plus, the iPod’s success allows Apple to cross-sell other services and devices to consumers. For example, Mac computer sales ballooned to 1.61 million last quarter. That’s up 30% from last year and a company record for any three-month business period.
And Apple has more tricks up its sleeve, too. The company is supposedly getting ready to enter the cellphone market with its own.
Sure, Motorola already has a cellphone that syncs with Apple’s iTunes music store and includes an iPod-like interface for navigating and playing digital music.
But Apple is known for its meticulous designs. The company will probably offer a full-fledged personal media device that includes a camera, vivid color monitor, complete iTunes features and integration, as well as a cellular phone. They’ll probably fly off the shelves.
One rumor – which I think is more right than wrong – says Apple placed an order for 12 million cellphones from Taiwan-based contract manufacturer Hon Hai Precision for delivery in the first quarter of 2007. That means we might see this new product early next year.
How might this device affect Apple’s bottom line? One forecast I saw estimated that an iPod phone could add $6 billion in sales and $0.70 a share in profits in 2007. While the numbers could change, an Apple phone could add a mountain of new profits.
I think Apple will be a triple-digit stock in a matter of months, and that’s why my Elite Stock Trader subscribers are holding the shares.
Only you know whether the stock fits your investment goals. However, when it comes to investing in consumer products like entertainment devices, I think it often pays to stick with the companies that are already dominating their niches.
One other thing I want to stress …
There Are Often Asian Companies
Making Money Behind the Scenes
I already mentioned that Hon Hai Precision could end up with the contract for Apple’s new phone. Think about all the money they would make by manufacturing the devices!
Just look at Foxconn Technology, the Taiwanese company that assembles Apple’s iPods. Foxconn operates a huge factory complex – known as “iPod City†– in Longhua, China.
The company has made a fortune from Apple’s business. How does Foxconn’s stock measure up? Right now, the shares are trading for slightly more than $300 (Taiwan) and Apple is around $86.
The most important part is this: At the beginning of 2003, Foxconn was at $19 and Apple was at $7. That means Foxconn’s shares increased by 400 percentage points more than Apple’s shares.
So, show me a hot U.S. stock and I can usually show you an Asian counterpart also going gangbusters.
My recipe for profits is simple: Pay attention to the trends, and then invest in the companies that are best positioned to ride those trends for all they’re worth. And remember, those companies can be found on both sides of the Pacific.
Best wishes,
Tony
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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