Investors Shoot Down Game Stocks

Video game shares tumbled in early trading, whacked by another round of rating cuts this week.

Morgan Keegan analyst Robert DeLean cut the nation's second-largest game publisher, Activision ( ATVI), to market perform from outperform on Wednesday morning, saying the company may be relying too heavily on one hit game -- the latest installment of the Tony Hawk skateboarding franchise. Roughly 28% of the company's publishing revenue will come from that game, according to DeLean's estimates.

"We know that Tony Hawk is selling extremely well and will likely be in the top five as a brand for the holidays," he wrote in a morning research note. "However ... ATVI's other brands are not getting the same traction this holiday season, which makes us weary of a potential revenue shortfall."

DeLean's action comes after UBS Warburg game analyst Michael Wallace slashed ratings on Monday on a slew of second- and third-tier stocks including Activision, THQ ( THQI), Midway ( MWY) and Acclaim ( AKLM), raising further speculation that laggard consumer spending may hit sales in the key fourth quarter.

"The fourth quarter remains tough," wrote Wallace on Monday. "We think that will keep some of these game stocks down for a while." Left untouched were market leader Electronic Arts ( ERTS) and Take-Two Interactive ( TTWO).

As for Activision, DeLean said, "You look at the balance sheet and valuation, and Activision does look cheap, but we're in an environment where if you miss, the stock will fall. And management isn't saying anything. Their silence gives us the answer."

Despite mounting evidence that games have become one of this year's safe havens for technology-stock investors, UBS Warburg's Wallace said the days of "buying the group" are over. Instead, game stocks, which are already attractively valued, will be trading on company-specific performances in the next year.

In early trading, Activision shares lost 58 cents, or 3.4%, to $16.44. Take-Two Interactive stock shaved off $1.20, or 4.4%, to $25.80. Electronic Arts dropped in sympathy by $1.29, or 2.1%, to $61.70. Shares of THQ dropped 37 cents, or 2.4%, to $15.61. Highly volatile issue Acclaim slipped 4 cents, or 4.5%, to 85 cents. Midway shares defied gravity, however, and rose 20 cents, or 3.6%, to $5.38.

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