Wall Street Beat: Games serious business

Electronic Arts' acquisition of Mythic Entertainment and a series of analyst reports spotlighted the electronic games sector this week. Though the hype surrounding the industry earlier in the decade has died down, trends in mobile, online and multiplayer gaming are reigniting interest in game makers.

Game-company share prices have been in the doldrums. Game developers could not live up to the buzz generated when online and mobile games started taking off. Innovative game makers such as U.S.-based EA and China-based The9 Ltd. and Shanda Interactive Entertainment Ltd. have underperformed against the Nasdaq Composite Index over the past year.

Rough waters may lie ahead. Schaeffer's Investment Research Thursday downgraded EA from "hold to "sell," in a technical analysis that examined recent insider and institutional investments and the company's share price trends. And from a global perspective, there are large unresolved issues. Companies are trying to figure out the best way to generate revenue from online play. Shanda Interactive Entertainment Ltd. said last month that first-quarter profits plunged after it moved from subscription fees to sales of items inserted in games.

Despite these warning signals, the sector looks as if it's gaining traction. Game-maker share prices gained Tuesday after Susquehanna Research changed its rating on the sector from "neutral" to "positive." The company said that after getting doused with realistic expectations, game makers are poised to come back. Expectations have reached "sober levels," Susquehanna analyst Jason Kraft said in a research note.

Late Tuesday, EA's announcement that it would buy Mythic for an undisclosed sum was a vote of confidence in massively multiplayer online role-playing games (MMORPGs), which allow multiple users to play together over the Internet. Mythic's breakout game in this category was Dark Age of Camelot.

The move sparked Kaufman Bros. to raise its rating on EA from "hold" to "buy." In a research note, Kaufman analyst Todd Mitchell echoed Susquehanna's assessment of the sector as a whole, saying EA shares have likely hit a "nadir," and are set to go up. EA's shares price (ticker symbol: ERTS) rose by $0.55 Wednesday to $41.96. Kaufman's price target is $52.

There are a variety of reasons why games are exciting. The three-way battle between Sony Ltd., Microsoft Corp. and Nintendo Co. Ltd. should spur the companies to innovate. The videogame market grew by about 17 percent from 2004 to 2006, according to IDC. Online playing is in its infancy, with huge potential.

Microsoft is acting as a catalyst in the mobile games market and also spurring cross-platform interoperability. Interface enhancements and mobile extensions to Microsoft's game software will let gamers use the same controls on consoles and mobile devices.

Though there's been consolidation in the sector, games are starting to generate the sort of Wild West excitement that characterized the wider Internet sector years ago. Despite the Schaeffer report, it's no wonder that five brokerages upgraded ratings on EA in the past four weeks alone.