Downgrade Weighs Down Game Stocks
In the latest sign that Wall Street is losing confidence in the video game industry’s ability to continue double-digit growth, a Goldman Sachs analyst on Friday downgraded three of the largest publishers and sparked a sell-off.
Citing disappointing November sales growth, Chris DiBiase downgraded Electronic Arts Inc., THQ Inc. and Activision Inc. to “underperform” from “in-line.” All three companies declined to comment.
Sales of video games grew 7.3% last month compared with November 2001, when Nintendo Co. launched its GameCube console and Microsoft Corp. released the Xbox. Many analysts had predicted as much as 28% growth for the month.
The downgrade sparked a sector-wide sell-off. Shares of Electronic Arts, the world’s largest publisher of games, fell $4.65, or 8%, to $56.70, resulting in a $417-million loss in market value. Activision shares retreated $1.37, or 8%, to $15.45. And THQ slipped 29 cents, or 2%, to $14.34. All three companies trade on Nasdaq.
Firms not mentioned by Goldman Sachs also lost ground. Take-Two Interactive Software Inc. fell nearly 10% to $23.36, and Midway Games lost 12% to $5.02.
DiBiase wrote in a report to investors that his action was based on signs that the video game industry may be maturing and that sales may be peaking earlier than expected. In expressing doubt about the industry, DiBiase joined UBS Warburg analyst Michael Wallace, who downgraded four game stocks Monday.
Their pessimism comes even as the industry expects to reap record sales of $12 billion this year.
In general, Wall Street analysts have been more cautious in recent months as their profession faces increasing scrutiny by investors and regulators.
Not all analysts share the negative outlook for the game industry.
Michael Pachter, director of research at Wedbush Morgan Securities in Los Angeles, vehemently disagreed with DiBiase’s assessment.
Last month’s sales of $713 million compared relatively poorly with November 2001, but that number was an anomaly because there were six fewer shopping days after Thanksgiving this year, Pachter said. In addition, last year’s results were fueled by the launch of the Xbox and GameCube, many of which came bundled with games.
“Our retail sources tell us that sales for the fourth week of November and the first two weeks of December are back up by 20% compared to last year,” Pachter said. “We remain confident there will be growth in December in the range of 20%.”
In November, Redwood City, Calif.-based Electronic Arts recorded $210.3 million in retail sales of console games, up 34% from a year earlier. Activision, based in Santa Monica, posted $75.9 million in sales, down 16% from last year, and THQ in Calabasas sold $72.9 million in console games, up 16%.
