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Electronic Arts, Activision: Game On or Game Over?


Last week the NPD Group reported that video game sales in the month of April had fallen 42% year over year. The news seemed to put an exclamation point on the death sentence of the era of console gaming. Ironically the demise of the big studio game comes at a time when the tablet craze has made gaming more popular than ever.

Ninentdo (NTDOY) just posted its first loss in 50-years and former studio kings Electronic Arts (EA) and Activision (ATVI) have struggled for years.

Though freely conceding the "April data was troubling," Wedbush analyst Micheal Pachter says all is not lost, at least for the legacy players. The $1 download Bird-based games get all the attention but "the hardcore gaming audience is bigger now than it ever has been," he says.

By "hardcore" Pachter means game players plugged into immersive online worlds, facing off in various battles and, more importantly for the companies, paying monthly subscription rates to do so. These titles represent captive audiences with a level of dedication seen no where else in entertainment, as evidenced by the server-jamming hype surrounding the release of Blizzard's "DiabloIII" earlier this week.

A division of Activision, Blizzard also runs the enormously profitable World of Warcraft and Call of Duty. Three of the reasons Pacther points out that Activision has increased earnings for over a decade straight, a feat almost unheard of in any other type of entertainment production realm.

Electronic Arts is about creating franchise titles. Madden, Tiger Woods, FIFA are all games EA "wants people to buy more than once." The strategy is working though, as is obvious from Electronic Arts and Activision's market caps, the Street isn't paying much attention.

For the sake of perspective note that Finnish gamemaker Rovio (aka: The Angry Birds Company) recently announced total revenues of just over $100 million last year, including plush toys. The company is being discussed as a potential $9 billion IPO. EA's current market cap is roughly half that amount.

Pachter says EA and Activision are never going to trade at 25x P/E rates that you see from fast growth companies but they're delivering growth rates at least along the lines of GDP. From that perspective he says the names are cheap at about 10x earnings (after charges). A move to a market multiple of about 15x earnings would suggest stock prices 50% higher than current levels. Pachter thinks we could see those gains "in the next year or so."

If he's right it would give struggling investors a huge "level up" from what they've been finding in markets over the last few years.