Analyst Slams Shares of Video Game Producers

Despite record sales of video games, a leading Wall Street analyst Monday downgraded the stock of four major publishers and sent shares across the industry lower.

Citing a possible slowdown in industry growth next year, UBS Warburg analyst Michael Wallace lowered his recommendations on Calabasas Hills-based THQ Inc., Santa Monica-based Activision Inc. and Midway Games Inc. from “strong buy” to “hold.” The new rating is two grades below his earlier designation. Wallace also downgraded Acclaim Entertainment Inc. to “reduce” from “hold.”

Early estimates of holiday sales suggest the industry is on target to hit a record $12 billion in sales this year, up 20% from 2001. But Wallace pointed to signs that the industry is headed for a slowdown.

In 2003, consoles will be in their second or third years, and consumers will start waiting for next-generation machines. Many analysts expect consumers to cut spending in 2004 in anticipation of faster hardware.

Wallace also said a glut of new games this year is making it difficult for some companies to generate substantial sales.

He predicted that returns from retailers of unsold games will cause many of these firms to take a financial hit in January.

None of the companies would comment on the UBS report.

Shares of Midway sank 15% to $5.70 on the New York Stock Exchange, while Acclaim lost 16.5% to 91 cents on Nasdaq. THQ fell 7% to $15.78 and Activision lost 6% to $18.12 on Nasdaq.

The losses outsized overall market declines of nearly 4% on Nasdaq and 2% on the Dow Jones industrial average.

Even companies that escaped the downgrade, Redwood City, Calif.-based Electronic Arts Inc. and Take 2 Interactive Software Inc., gave up ground, though their losses were less than the overall market. EA shares fell $2.07, or 3%, to $63.95, while Take 2 lost 80 cents, or 3%, to $28.12.

“Wall Street tries to anticipate things,” said Todd Dagres, a partner at Battery Ventures in Wellesley, Mass., which has no stake in video game companies.

“The conventional wisdom is that the market a year from now will start to trend down because it will approach the end of its cycle,” he said.