Video-Game Stocks Played Out

BOSTON (TheStreet) -- Video games will be hot gifts this holiday season, judging from Black Friday sales.

With freshly cut prices for three major consoles,Nintendo's Wii, Sony's(SNE) PlayStation 3 and Microsoft's(MSFT) Xbox 360, and a slate of new games, there's plenty for kids to clamor for.

Still, brisk sales don't make video-game makers surefire picks for your portfolio. Recent history hasn't been kind to those companies, and now isn't the time to jump back in.

Game developers' returns have been dismal over the past year, when the S&P 500 Index rose 29%. Activision(ATVI) and THQ Inc.(THQI) fared better than most, with increases of 4.6% and 22%, respectively, but THQ's position seems to be highly suspect as investors representing 12.7% of its shares outstanding are betting the stock will fall.

Take Two Interactive(TTWO) has gained only 2.9%, while Electronic Arts(ERTS) and Konami(KNM) have fallen 8.9% and 24.7%, respectively. The culprits for these poor performances have been returns on equity and net margins. High fixed costs due to game development and massive selling expenses owing to fat marketing budgets have eroded profits.

In fact, those costs have outstripped revenue increases, which have been buoyed by new titles. While most of the developers operate debt-free, surprisingly, there's little to justify they can be satisfactorily profitable despite impressive offerings.

Sales figures for some games are quite compelling. Activision's latest, Call of Duty Modern Warfare 2, was released earlier this month and sold over 4 million units on the first day alone, generating an astonishing sales estimate of $310 million.