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Video Game Stocks: Ready to Score

Investors once thought that the would be recession-proof, as pinched consumers cut back on expensive entertainment and honed their couch potato skills in front of the TV. It hasn't worked out that way, at least so far in 2009, with sales of game consoles and software titles suffering year-over-year declines for the past four months. In June, industry sales slid 31% from 2008, according to a July 16 report from market research firm . Battered Share Prices As a result, investors have dumped stocks across the industry. Shares of Electronic Arts ( (ERTS)) are down 54% over the past year, Activision Blizzard's ( (ATVI)) stock price has lost 35%, and Take-Two Interactive Software ( (TTWO)) shares have fallen 65%. But analysts say that in the midst of the industry's weakness lies opportunity. They note that the industry has become more like Hollywood, with a large portion of revenues driven by a few blockbuster hits. The recent sales drop was caused by a lack of hot new releases and an aging group of game consoles. Microsoft's ( (MSFT)) Xbox 360, Sony's ( (SNE)) PlayStation 3, and Nintendo's ( (7974.T)) Wii were first released in 2005 and 2006—ancient history in gaming terms. On both fronts, sales should accelerate in the second half of 2009, bolstering at least some of the sector's stocks, the analysts say. A slew of new game titles expected later in 2009 should be major hits. And hardware sales should get a boost from new motion-sensitive controllers for the Xbox 360 and PlayStation 3. Price-cutting could also help bolster console sales, giving a further boost to revenue from new games. Analysts Predict Upswing "The industry is alive and well and the second half will be far stronger than the first half," says Todd Greenwald, an analyst with in Baltimore. Greenwald said he was impressed with many of the upcoming titles he saw previewed at the E3 industry gathering in June, including Call of Duty: Modern Warfare 2 and Tony Hawk Ride from Activision and Dante's Inferno and Saboteur from Electronic Arts. He also looks forward to Assassins Creed 2 and Splinter Cell: Conviction from France's Ubisoft Entertainment ( (UBIP.PA)). Michael Pachter, an analyst in ' Los Angeles office, describes games released in the first half of 2009 as "terrible" in comparison to the same period in 2008. He predicts sales declines will continue into August but then turn up sharply. "After that, it's off to the races, with 20% to 30% growth in September alone," says Pachter. "Consumer confidence will be reflected with that level of growth and investor confidence will return." He rates Activision, Electronic Arts, and Take Two all "outperform." Still, the pain for investors in the sector could continue for a few more months, says equity analyst Jim Yin. While he likes Activision's second-half game slate, for example, Yin worries that weak consumer spending will hurt the company in the short term. He lowered Activision from buy to hold last month as the shares, which closed July 21 at 11.94, approached his price target of 14. "With the recent rise in the stock price along with further weakness in sales, I downgraded the stock," he explains. Yin has a sell rating on publisher THQ ( (THQI)), which could report a loss in fiscal 2010. Indeed, while the hoped for revival could spark share prices later this year, investors, like seasoned gamers, should select their targets carefully.
Pressman is a correspondent in BusinessWeek's Boston bureau.

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