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Stock Strategist

Three Video Game Firms with Long-Term Tailwinds

Bumps in the road may provide opportunities for long-term investors.

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Console transitions are difficult times for video game publishers such as  Electronic Arts (ERTS) and  Activision (ATVI). Gamers will spend several hundred dollars to buy  Microsoft's (MSFT) Xbox 360 or  Sony's (SNE) PlayStation 3, which leaves them with less money to buy games. In addition, people tend to delay purchasing new games until they can get their hands on a new console. Unfortunately for the game publishers, supplies of the Xbox 360 have been tight and the introduction of the PlayStation 3 has been delayed. As if slowing sales were not enough, publishers must spend significant sums to develop games for the new consoles, which further pressures profit margins.

As you can imagine, 2006 will be a forgettable year for the video game industry. However, if you're willing to take a longer-term view, console transitions provide an opportunity to buy excellent businesses at reasonable prices.

Toan Tran does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.