Activision Leads Gamemaker Rally

A slew of sell-side upgrades boosts the sector, which is expected to have a big year.
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The game is still far from over for

Activision

(ATVI) - Get Report

.

The video game maker, which enjoyed a big bounce last month when it

raised guidance, jumped again Wednesday on two analyst upgrades. As of 1:30 p.m. EST, Activision shares were up $1.31, or 7.5%, to $18.76.

UBS Warburg analyst Michael Wallace raised his rating on Activision to buy from neutral, and Morgan Keegan analyst Robert DeLean raised his rating to outperform from market perform. (UBS has done banking with Activision, and Morgan Keegan has not.)

Meanwhile, a WR Hambrecht upgrade to buy from hold on fellow gamemakers

Electronic Arts

(ERTS)

,

THQ

(THQI)

and

Take-Two Interactive

(TTWO) - Get Report

was aiding Activision's rivals, though less dramatically. Shares of EA were recently up $1.25, or 2.7%, at $48.10; THQ was up 12 cents, or 0.7%, at $18.70; and Take-Two was up 96 cents, or 3.1%, to $31.83. (WR Hambrecht hasn't done any banking with those companies.)

Both Wallace and DeLean expressed optimism that Activision can still beat its recently raised third-quarter guidance, which was already ratcheted up significantly to 67 cents a share on $480 million in revenue from 45 cents a share on $390 million. Wallace believes Activision benefited from an unexpected strong industry finish to the holiday season that was probably not reflected in that new guidance issued in mid-December.

The first signal of Activision's strong holiday results will come from retail sales figures reported by industry tracker NPD Group. The results are due out late this week or early next week, offering one potential catalyst for the shares to go up, DeLean said in his note.

Both analysts also expect the company to do better in the fourth quarter ending in March because of a strong release schedule. Overall, 2004 should be big year for the company, with sequels to

Doom

and

Quake

as well as four titles tied to movies. "We think the company's 2004 lineup is the best in its history," Wallace wrote.

Expected

console price cuts also will help by boosting console sales higher in 2004 than in 2003, he said.

DeLean said he believes the most likely scenario is that

Sony

(SNE) - Get Report

cuts the price of PlayStation 2 in May to $149 from $179, quickly followed by

Microsoft

(MSFT) - Get Report

cutting prices on Xbox.

There's a 50-50 chance for a second console price cut in the fall to $129, he added, noting that the current price is still a hurdle for many consumers. "Lower

console price points bode well for publishers such as

Activision that have a heavy mass-market focus in calendar 2004," he said.

WR Hambrecht's Bill Lennan was similarly bullish about 2004, also pointing to the release this fall of

Grand Theft Auto 5

-- which he called the "blockbuster of all blockbusters" -- being a major boost for Take-Two shares and for the industry in general.