Analyst Outlines 'Cautious' Outlook On Game Sector

According to a new report from weblog Seeking Alpha, analyst firm Bear Stearns has restarted its coverage of major Western game publishers, questioning long-term industry profitability along the way. Edward Urban highlighted shares of Electronic Arts, Activision, and THQ as Peer Perform, while those issued by publisher Take Two as Underperform, citing a cautious outlook on the industry in the march up to the launch of the PlayStation 3 and Wii. “While we are sanguine on revenue growth for the industry, we are more cautious in our views of industry profitability given substantial cost increases,” wrote Urban. “In the new cycle, publishers are reckoning with bigger game budgets that make a flop on a particular title more costly. Our forecasts assume that any publisher that simply maintains market share will not be able to show earnings growth cycle over cycle.” Looking to Redwood City-headquartered Electronic Arts, the firm noted that the company has benefited from sales resulting from software for current generation platforms. However, despite this, Bear Stearns remains cautious in its outlook for EA through the coming holiday season, during which time the company expects EA shares to experience a “modest pullback from current levels.” A similar stance was taken with THQ, with the firm also advising its investors to “trim positions” with regards to both companies. Concerning Take Two, the firm advised its investors to sell their shares of the troubled company, citing a number of issues such as “poor execution, lack of guidance, grand jury subpoenas, and an SEC inquiry” as key reasons for what Bear Stears anticipates will be disappointing financial results. “Based on the most recent NPD sales data,” wrote Bear Stears analyst Edward Urban in a research note, “we estimate 4Q06 revenues were approximately $300mm, compared with the current consensus of $346mm.” Take Two is currently undergoing an internal investigation on top of an official investigation launched by the SEC in July. Recently, the company commented that it plans to release its financial report following the completion of that investigation, noting at that time that it would be filed "as soon as practical."