Game-Makers Not Cashing In on Console Mania

Although two new video-game consoles were launched in time for the holiday season, most game publishers didn't end fiscal 2007 with a bang.

The unexpected success of Nintendo's(NTDOY Quote) Wii console, as well as slower-than-expected sales of Sony's(SNE Quote) PlayStation 3, threw publishers Electronic Arts(ERTS Quote) and THQ(THQI Quote) into a tizzy as they were forced to reallocate resources to create games for the Wii.

Both publishers had bet -- to varied extents -- that the PS3 would emerge as the leading console in the market.

The result? Both companies disappointed investors with their outlook for the coming quarter.

Shares of EA, which had been up nearly 5.9% in the three months before its results, are down 4.2% since the company reported earnings on May 8; THQ is down 2% since it posted results two days later.

"What you saw were people getting nervous that the next-generation console cycle is taking longer to materialize than they thought," says Michael Pachter, an analyst with Wedbush Morgan, which does not have an investment banking relationship or hold shares of EA, Activision(ATVI Quote) or THQ.

"I think investors were overly euphoric a quarter ago that the transition to new consoles would be behind them in a few weeks after the launch of the Wii and PS3, but reality set in this quarter," he says.

Still, the fourth-quarter results may have thrown up some opportunities for investors as valuations came off their highs a quarter ago when the console mania was at its peak, says Dan Ahrens, portfolio manager for the Ladenburg Thalmann Gaming and Casino Fund, which holds shares of EA, Activision and THQ in its portfolio.