Game Stocks: Headed for Meltdown?

Game Stocks: Headed for Meltdown?

Monday, September 15th, 2008. It’s already known as “Black Monday,” as two major firms, Lehman Brothers and Merrill Lynch, imploded. While the latter was absorbed by Bank of America, the former dissolved in the largest bankruptcy in American history. That chaos took a major toll on investor confidence in all sectors—the Dow and NASDAQ suffered massive drops across the board, with more losses still expected to come. After all, firms as large as Lehman Brothers have their hands in a lot of corporate pies.

For the games industry, as it has been for many industries, the losses have already started—most publicly traded publishers experienced share price declines Monday, which continued into Tuesday. This is not surprising, as short-terms safe havens for investment are few and far between following such a major catastrophe. But for the smart investor looking for a long-term bet, do game companies still hold up? To find out, we went right to the financial analysts who watch the market closest.

Looking at current investor confidence, the answer might seem to be an emphatic “no.” “Realistically, investors are running for the hills,” says Wedbush Morgan analyst Michael Pachter. “THQ is melting down, near a five year low, and EA is also near its five year low.”

Signal Hill Capital Group’s Todd Greenwald agrees that the “current environment is definitely negatively impacting sentiment, and that is weighing on shares of the videogame sector.”

Lazard Capital Market’s Colin Sebastian expects that, thanks to increase investor sensitivity as a result of the turmoil, “share prices of video game stocks are likely to remain volatile.”

Analysts, however, remain bullish on the long-term prospects of the games industry, brushing off these short-term impacts as possibly false reactions. “We have a market that is throwing the baby out with the bath water,” says Sterne Agee & Leach’s Arvind Bhatia. Bhatia believes that “individual company fundamentals have been overshadowed by macro concerns” saying that EA, Activision and GameStop remain good buys for long term investors, particularly at the “currently reduced valuation levels”.

Greenwald believes that the chaos “should be of little real fundamental impact” to the games industry. “Fortunately, virtually all of the public gaming companies are all cash-rich, have no debt, and don’t have any real need to raise or borrow money anytime soon,” he explains, which should help extricate the industry from the flailing financial sector.

Sebastian agrees, explaining “I believe the fundamental drivers for industry growth remain in place, and that interactive entertainment is an attractive sector for investors looking for some stability and visibility in the otherwise rocky consumer environment.”

Pachter admits that recent internal upheavals in the games industry itself makes it a bit difficult to tell what is affecting investor sentiment most. Citing the recent drama between EA and Take-Two and the formation of Activision Blizzard, he told us, “There is so much noise going on that it’s hard to sort out how investors feel about the sector as a whole.”

And if the result of Black Monday is a weakened economy and decreased consumer purchasing power? Even then, the games industry could remain a beacon. “I think the sector should hold up fairly well as it is largely driven by its own factors, such as console sales and hit titles, rather than typical consumer spending patterns,” says Greenwald.

So while there are plenty of financial opportunities to avoid in these dark days, analysts agree that the games industry is not one of them. “Confidence “should” remain high,” says Pachter.