It's a big day for video games makers today as Electronic Arts , the single biggest name in the space, and THQ both report after the bell today. But despite a healthy run in EA shares, this might not be the slam-dunk investment you think it is.
We know EA had a strong quarter thanks to the company's pre-announcement a few weeks back. Thomson Financial expects 20-cents a share, the tippy top of the company's guidance, but that's because the company already indicated it would beat original expectations. But the drivers that contributed to the big success in EA's September quarter may not sustain through the important holiday shopping December quarter.
There some key flies in the EA ointment, despite the success of "Madden NFL '08." We know its widely anticipated "Army of Two" has been delayed, as well as some lesser titles. Microsoft/Bungie's "Halo 3" completely dominated game sales in October, selling 3.3 million copies, according to NPD group, outselling the next nine top titles in the Top 10, by better-than two-to-one, combined! There's also news from iSuppli that video games software sales in the September quarter tilted noticeably to Nintendo which surpassed Sony for the first time, as I indicated in an earlier post.
Microsoft's Xbox may be bringing up the rear, but both Nintendo and Microsoft saw nice sequential and year-over-year growth while Playstation stayed flat. With so much of EA's business tied to the Playstation's success, that could mean problems for the company if Nintendo and Microsoft continue to surge.
Evan Wilson covers games for Pacific Crest Securities and he told me this morning that during the last console cycle, when Sony was riding the Game Cube momentum, EA went from 11% of the market to 23% of the market.
But since then, EA has been losing marketshare, and he attributes that to the company's ongoing reliance on Sony, with no emphasis on the Wii. If that trend continues, and Nintendo's momentum stays solid, we could see softness in EA's business in the fourth quarter. Even as Activision and even Take-Two Interactive chisel away at EA's marketshare.
EA expects a new, full-year EPS range of 90 cents to $1.20, with much of the Street clustered around the high-end of the range. With the optimistic tone in its pre-announcement for the September quarter, there's a thought that the Street is anticipating a raise in that guidance.
Wilson says the company could raise the low-end of the range, but he's not anticipating any increases at the top; and that could also be taken as a disappointment. On the topline, the Street expects $3.7 billion for the year, but there will be a decidedly stronger focus on EA's earnings potential.
EA's been on a nice run since its mid-$40's range in August. Today, it's near its 52-week high, but analysts I'm talking to say good news in the company is largely baked into shares already, with little opportunity for upside, unless there's a dramatic revision to the top and bottomline expectations.
For THQ, the company recently lowered guidance because of ongoing title delays. Most analysts are already looking ahead to fiscal 2009 as the time when THQ can once again reclaim some measure of star-status in the sector. Activision, expected to post a loss when it reports earnings Monday, is likely to sound an optimistic tone during its conference call, enjoying a nice bump from the serious buzz surrounding its "Guitar Hero" franchise.
Gaming's fun, but still not the easiest place for investors to negotiate the opportunities.
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