Shares in the leading video game software companies rose on Monday after a bullish analyst report on the sector.

The next console cycle, set to begin next year, should spur revenue and earnings growth at companies such as

Electronic Arts

(ERTS)

,

THQ

(THQI)

and

Take-Two Interactive

(TTWO) - Get Report

, J.P. Morgan analyst Dean Gianoukos said in a research note Monday. Assuming the companies' fundamentals perform as expected, their stocks should outperform the market, Gianoukos said, upgrading each of the three companies to overweight from neutral.

"We believe that if the

companies hold their five-year average relative multiples onpeak earnings, each of the stocks could provide significant upside, and potentially the most appreciation in our leisure universe," he said. (Take-Two has been an investment banking client of J.P. Morgan in the last year. J.P. Morgan has also provided non-investment banking services to Electronic Arts in the last year. THQ has not been a recent investment banking client of the firm.)

In recent trading, EA shares were up $2.29, or 5.2%, to $56.98; THQ's stock was up $1.08, or 4.8%, to $23.81; and Take-Two's shares were up $1.22, or 3.6%, to $34.93.

Gianoukos' positive outlook appeared to jumpstart the entire sector. Although they weren't the subject of his report -- or were only mentioned in passing -- other video game publishers also saw their shares rise on Monday. Recently,

Activision

(ATVI) - Get Report

shares were up 82 cents, or 4.6%, to $18.57;

Midway's

(MWY)

stock was up 47 cents, or 4.6%, to $10.65; and

Atari's

(ATAR)

shares were up 17 cents, or 8.1%, to $2.25.

Video game stocks have been on a roller coaster ride in recent days. On Friday, shares in such companies

traded higher despite largely disappointing November sales figures. Earlier last week, a slew of downbeat analyst reports tripped up video game stocks, most notably those of

THQ and

Activision.

Many investors and analysts have been somewhat pessimistic about the short-term prospects for the video game companies and their stocks. Analysts expect

Sony

(SNE) - Get Report

,

Microsoft

(MSFT) - Get Report

and

Nintendo

to introduce their next-generation consoles over the next two years.

In the past, console transitions have lead to increased costs as video game publishers increase their development efforts for the new platforms. At the same time, such transitions have seen declining sales as the average selling price for the old consoles decreases before sales of new, higher-priced games for the new consoles can fill the gap.

The various game companies have vowed to navigate this console transition better than they have previous ones. But even Gianoukos is predicting a 3% decline in revenue in fiscal 2006.

Still, the J.P. Morgan analyst is optimistic about the video game companies' longer-term prospects. Gianoukos predicted that revenue in the sector would grow 5% in fiscal 2007, 18% in fiscal 2008, 11% in fiscal 2009 and 4% in fiscal 2010. Earnings for video game companies should increase in tandem with the revenue rise, he said.

At the peak of the next console cycle, Gianoukos expects Electronic Arts to earn $2.85 a share, THQ to earn $2.20 a share, Activision to earn $1.10 a share, and Take-Two to earn $3.75 a share.

In their most recent fiscal years, EA earned $1.87 a share, THQ earned 92 cents a share, Activision earned 54 cents a share, and Take-Two earned $2.27 a share.

(J.P. Morgan has done investment banking business for Activision in the last year.)