Video Games: Worth the Wait?

Although EA had one down earnings year during the last console transition, this time around it will have at least two. Activision, which has prided itself on consistently posting revenue growth over the last 13 years -- through two previous console transitions -- is now predicting sales will be essentially flat this fiscal year with last year and will fall more than 20% next year. THQ, which had been predicting a billion dollars in sales in fiscal 2007, is now cautioning investors that its sales will fall shy of that magic number.

Despite the disappointing news, investors largely have kept faith with the companies' stocks. While shares of THQ and Activision have declined since they reported, estimates of their fiscal 2007 earnings have fallen far more sharply than their stocks. And shares of EA are actually up more than 1% since it reported earnings last Thursday.

Notes from sell-side analysts that followed the earnings reports generally pointed to the improvement in earnings expected in 2008 or beyond, suggesting that investors look to the future. Making the case for EA, one unnamed buy-side analyst, whose firm owns the shares, argues that the stock should at a minimum appreciate 50% over the next four years.

"That's what I consider a more conservative scenario," the analyst says. "Where else can I feel confident that I can get a 50% return over the next four years?"

But other investors are far less confident in that kind of return from EA -- or the rest of the sector.

Regardless of the longer-term outlook, as these companies work through the transition, their stocks are likely to be flat. Indeed, for most of the major publishers, that's been a best-case scenario for the past year. Activision is up just 1% over that time frame, while EA is down 21%, Take-Two Interactive (TTWO Quote) has plunged 40% and Atari (ATAR Quote) is off a whopping 68%.