Shares of video-game publishers skidded Friday after a disappointing report on November sales led to another round of downgrades by leading analysts. Although there was general concern about slowing industry growth and sluggish consumer spending, a few analysts remained optimistic, saying that the Street was overreacting to a report by market researcher NPD Group. The slide started when Goldman Sachs analyst Chris DeBiase wrote that November data from NPD came in worse than expected, with only 7.3% year-to-year growth and $712.5 million in overall sales. DeBiase wrote that his expectations were for growth of 20% to 25%. Electronic Arts ( ERTS) fell to $55.23, off $6.11, or about 9.96%, while Activision ( ATVI) slipped $1.57 to $15.71, a drop of 9.3% DeBiase lowered his estimates, took down his ratings to underperform and moved his view of the sector to cautious. He was particularly hard on Activision, which registered total November sales of $48.5 million, a drop of 28%. "To say this was a disappointing figure would be an understatement," and he noted that, with the exception of Tony Hawk 4 and Spider-Man, "no titles are coming close to expectations." Goldman Sachs has done investment banking for Activision. Electronic Arts' sales in the period rise 16% from a year ago, and THQ's ( THQI) sales rose 9%, according to the NPD report. Other game publishers, which have enjoyed robust growth in the past year, in part from the introduction of new game consoles, such as Sony's PlayStation 2, also were weak. Take-Two Interactive Software ( TTWO) dipped 9.3% to $23.38, and THQ Inc. was down 3 cents to $14.60 in recent trading. Also downgrading game stocks on Friday was U.S. Bancorp Piper Jaffray analyst Tony Gikas, who moved Activision to market perform from outperform and lowered Acclaim Entertainment ( AKLM) Inc. to market underperform from market perform.
Not everyone who follows the sector was negative. Analyst Felicia Rae Kantor of Lehman Brothers said the market was overreacting to the sales numbers and noted that overall growth for the year was close to projections. Kantor, whose company has no investment banking business with Electronic Arts, has not changed her outlook on the company, which she ranks as "even weight." "This data
software sales up only 7% will probably disappoint some people, but the tough comparison with hardware launches last year and no post-Thanksgiving week this year have to be taken into account," UBS Warburg analyst Mike Wallace said in a note to clients on Friday. "We don't think the industry is as bad as the data suggests." A note from Wallace on Monday downgrading Activision, Midway Games ( MWAY), THQ and Acclaim caused a drop in stocks across the sector. Activision shares were hit again on Tuesday and Wednesday when brokerage Morgan Keegan downgraded the stock. UBS Warburg has done banking for Acclaim, Midway and THQ. NPD's report on gaming hardware also disappointed some analysts. Goldman's DeBiase said, "We believe this indicates that the console cycle is indeed slowing." Overall hardware units were down 12% year to year, with the one bright spot being the PS2, which sold 1.3 million units (up 45% year to year). Sellthrough on Xbox was 470,000 units (down 35%) and GameCube sold 465,000 units (down 30%).