Video Game Stocks Fall on Downgrade

Shares in video game publishers slipped on Friday, extending a week-long slump, after Goldman Sachs downgraded the sector, citing fears that a slowdown in growth has come sooner than expected.

Goldman's warning, on top of downgrades from other brokerages and market research showing industry sales growth slowed in November, weighed on a sector that has been under heavy pressure all week.

Goldman analyst Chris DeBiase cut his opinion on the sector to "underperform/cautious" and downgraded Electronics Arts (ERTS), the industry leader, and Activision (ATVI), which is No. 2, to "underperform" from "in-line."

Shares in game publishers, which have enjoyed robust growth in the past year on the back of competition between three advanced game consoles — Sony Corp.'s  PlayStation 2, Microsoft Corp.'s (MSFT) Xbox and Nintendo Co. Ltd.'s GameCube — were down as much as 7 percent.

Shares in specialty video game retailers were also lower.

Goldman's cuts came after research firm NPD Group said November interactive game software sales rose only about 7 percent from a year earlier, compared with a 74 percent rise in October.

"We downgraded our ratings on the companies in this sector in October, citing concerns about slowing industry growth in 2003...," DeBiase said in a note to clients. "The November NPD data leads us to believe that this slowdown has occurred more quickly than we expected."

U.S. Bancorp Piper Jaffray analyst Tony Gikas on Friday cut his rating on Activision to "market perform" from "outperform" and lowered Acclaim Entertainment Inc. (AKLM) to "market underperform" from "market perform."

Gikas said the 7 percent growth in November sales was less than his 15 percent forecast. He cut his revenue forecast for Activision for the December quarter to $390 million from $460 million, citing the NPD numbers and "questions surrounding previous guidance by management."

He based his downgrade of Acclaim on poor product performance and "limited confidence in (calendar 2003) product line."  

Some See Buying Opportunity

However, a number of analysts said the year-over-year sales comparisons for November were hurt by the fact that last year's November sales period included more than a week of post-Thanksgiving holiday shopping, while this year's period included only 2 post-Thanksgiving shopping days.

"This data (software sales up only 7 percent) will probably disappoint some people, but the tough comparison with hardware launches last year and no post-Thanksgiving week this year have to be taken into account," UBS Warburg analyst Mike Wallace said in a note to clients on Friday. "We don't think the industry is as bad as the data suggests."

A note from Wallace on Monday downgrading Activision, Midway Games, THQ and Acclaim caused a drop in stocks across the sector. Activision shares were hit again on Tuesday and Wednesday when brokerage Morgan Keegan downgraded the stock.

However, in his note on Friday, Wallace said the sector was oversold, a sentiment Commerce Capital Markets echoed specifically for Take-Two.

A note on Thursday from RBC Capital Markets analyst Stewart Halpern suggested that sales are actually up this week over last week. He called shares in both Activision and THQ "compelling risk/reward opportunities."

Shares of Electronic Arts Inc. ended down 7.6 percent to $56.70, while Activision Inc. slipped 8.2 percent to $15.45. Acclaim finished off 7.9 percent at 82 cents.

Take-Two Interactive Software Inc. (TTWO) dipped 9.8 percent to $23.36, Midway Games Inc. (MWY) closed off 11.9 percent at $5.02, and 3DO Co. (THDO) was off 6 percent at $2.52.

Among specialty video game retailers, Electronics Boutique Holdings Corp. (ELBO) was down 5.9 percent to $23.60 and GameStop Corp. (GME) dropped 12.7 percent to $15.80.

For the week, Electronic Arts shares ended down 14 percent, Activision was off 20 percent, THQ Inc. (THQI) was down almost 16 percent, Take-Two came down more than 19 percent, Acclaim was off 16 percent, Midway was down more than 25 percent, and 3DO was off almost 13 percent.