Strong NPD Meets Mixed Reception As Stocks Fall

With many analysts and execs awaiting October's NPD results as the litmus test for the game biz's long-term health in a downturn, the strong month means the industry can loosen its belt and heave a sigh of relief, right? Not so much. Shares of major game publishers took a hit this morning -- as of press time, Electronic Arts is down over 9 percent, while Activision Blizzard appears to have slipped almost 13 percent. The big three console makers are all down by single-digit percentages, too -- even Nintendo, whose solid hardware and software sales alike claimed big wins in October NPD, though all U.S. stocks are down significantly today. Why? Because a strong month for the industry can't alleviate investor concerns about the publishers' missed earnings estimates; Activision and EA in particular didn't meet the expectations of analyst groups like Wedbush Morgan, and this morning Merrill Lynch downgraded ratings for the two leading publishers from Buy to Neutral. "Recent data points indicate that consumer shopping is trending more negatively in November," Merrill Lynch analyst Justin Hall said in a research note printed by Barron's, expecting anxiety over consumer spending and pressured prices will "keep a lid on the stocks over the holidays." But while none may rest easy yet, other analysts still reacted positively to the NPD numbers -- both Cowen Group's Doug Creutz and Wedbush Morgan's Michael Pachter used the phrase "recession-resistant" as they responded to the results. "We note that October was at the height of pessimism concerning the economy, and yet it still had very solid sales growth," says Pachter. He says this growth implies that on a fundamental level, the downturn hasn't affected video games, but the fact that publishers missed their expectations is still significant. Still, Pachter looks to hardware sales as the key barometer -- noticing that with Xbox 360 hardware sales beating his expectations and PS3 sales lighter than he'd thought, "we believe there were some substitution of Xbox 360 for PS3 purchases," he says. "We believe that solid hardware sales should imply continued software sales strength through the holidays, and continue to believe that the video game software sector remains highly recession-resistant." Cowen Group's Creutz says October NPD results "should help allay concerns that holiday game sales will suffer due to economic weakness." "Given the undeniably positive October results, we continue to expect industry sales to remain healthy though the holiday season," he adds. But with October -- and its stronger-than-usual title lineup now in the rearview, Pachter looks to November. "The real test of the recession’s impact on video game consumption will come in November, when gift givers may begin to show signs of feeling the economic downturn." Interestingly, Take-Two's shares see a modest 3 percent increase as of press time; investors may be heartened by Board chairman Strauss Zelnick's explanation yesterday of the company's strategy to release fewer, stronger titles and explore alternative business models -- and his willingness to be more blunt about his concern for the holiday season.