Investors playing the game

The trade event of the year for the interactive entertainment industry, E3 Expo 2011, will draw in the crowds this week as the leading computer and video game companies reveal the future of interactive entertainment. There is even excitement towards Sony and the Play Station Network despite the recent hacking attack and rumors of more to come. There seems to have been a U-turn in the ways investors tend to predict the contrasting fortunes of gaming retailers versus game publishers in this booming industry. Stocks being mentioned include: Sony Corp (TYO:6758), Ubisoft Entertainment SA (EPA:UBI), Electronic Arts Inc (NASDAQ:ERTS), Gameloft SA (EPA:GFT), Glu Mobile Inc (NASDAQ:GLUU), GameStop Corp (NYSE:GME), The Game Group Plc (LON:GMG).

The Big Three

Short interest in industry giants, Nintendo and Microsoft is always low given their large market capitalization and the diversity of industries in which they have exposure. The ongoing media furor surrounding the remaining player, Sony following the hack into its Play Station Network (PSN) has not resonated with short sellers. Short interest in Sony Corp (TYO:6758) and its ADR (NYSE:SNE) remains at less than 0.5% of the total shares outstanding on loan, despite convertible bond arbitrage.

New games, new prospects

Europe’s largest video game producer, Ubisoft Entertainment SA (EPA:UBI) will join its peers in announcing the launch of new games. The share price has drifted down by a third since the start of the year and is currently trading close to annual lows. Although short covering has led short interest to halve over the year, 6% of the total shares outstanding is still out on loan. Large funds who lend remain bullish towards this stock, increasing total lendable holdings to 16% of total shares.

The buzz of online and mobile gaming

Online and mobile gaming are held as the bright stars for the industry. Electronic Arts Inc (NASDAQ:ERTS) has announced its online service, Origin, which allows customers to download games. Could this be the game changer? Conflicting investor sentiment has been building over the past year with the longs increasing their holdings to 30% of the total shares, and in doing so, has helped fuel the share price to reach an annual high. However, short interest has quadrupled since December to 4% of the total shares outstanding on loan.

The two largest listed pure-play mobile gaming stocks Gameloft SA (EPA:GFT) and Glu Mobile Inc. (NASDAQ:GLUU) have had to evolve their business models from pay-to-play models to the “freemium” model, where online adverting will form an increasingly important component of revenue. Both stocks have caught the attention of short sellers since March. Short interest has surged from insignificant levels to 4% of total shares outstanding on loan for both stocks. In contrast, institutional investors have been increasing their holdings in the stocks.

Game over for retailers?

With game manufactures enabling consumers to buy their games direct online, it is worth exploring the effect on the specialist gaming retailers. Short interest in GameStop Corp (NYSE:GME) ranks amongst the highest in the S&P 500 despite the shares reaching a new annual high recently. Short interest peaked at a staggering 32% of total shares in late April before shorts covered over the past month to 26%. Institutional investors have reduced their holdings since December by 15%, but still hold 38% of total shares outstanding.

Shares in the Game Group Plc (LON:GMG) have halved over the past year and are currently trading at annual lows. Short interest has also fallen from 4% to less than 1% of total shares outstanding on loan over the same period.