Video Games: Worth the Wait?

"There's an opportunity cost to continuing to hold [the video-game publishers' stocks] as the cycle transition draws out," says Tony Ursillo, a buy-side analyst with Loomis Sayles. "You could have been in other names that are working outside tech or in tech." Ursillo's firm has long positions in EA and Activision.

But Ursillo and others even question the longer-term bull case. Sales may not grow as quickly as the faithful expect, suggests Joe Spiegel, managing member of Dalek Capital, a hedge fund. In the near term, there's been a lot of buzz about the Xbox 360, but shipments of the game machine have been disappointing, putting a lid on the number of games anyone can sell for it, he notes.

Although bulls point to revenue from ads sold within games, an increase in online games, and price increases on next-generation titles, Spiegel says all of those could prove more hype than reality. Consumers could well reject ads in games; few online games have drawn a mass audience; and consumers have generally been price-sensitive, putting into question each of those developments.

"People are getting excited about certain ideas that really they shouldn't be," says Spiegel, who is long shares of, and short put options on, Take-Two, but who has no other positions in the sector.

But it's not just future sales that could disappoint. Development costs of next-generation games are ballooning, Ursillo and other analysts note. So, too, are costs related to licensing sports teams and movie content. As a result, game publishers' earnings could end up growing more slowly than bulls believe. And that could have big implications for the future value of their stocks.

"If you don't have a very bullish-case scenario, you're holding out for total appreciation that isn't going to measure up," says Ursillo.

That's not to say that Ursillo or the other skeptics are blackballing the sector. "I'm willing to own them at lower prices," he says. "I just don't think the upside justifies buying them today."