Market Overview

The Show Is Over For Guitar Hero (ATVI, VIA, ERTS)

The show is over for the Activision (NASDAQ: ATVI) video game “Guitar Hero.” The Associated Press reports that the publisher has decided to pause production of the Guitar Hero and Tony Hawk video game franchises in 2011.

This follows the news that Viacom (NYSE: VIA) had sold Harmonix, the creator and developer of the Rock Band series, after lackluster sales of Rock Band 3.

One possible reason for the stagnation in demand could be the equipment that the games require. Bulky equipment such as microphones and musical instruments make the games more expensive and cumbersome than traditional games.

Concerns about Activision are mounting. As almost 70% of Activision's revenue at times has come from single video games (Call Of Duty), any major blows to video game profits could cause serious shareholder losses.

Nevertheless, cutting “Guitar Hero,” a household video game name especially to adolescents, may be the best move for Activision. Activision has failed to make adequate profits from the game after the initial rush when it was introduced. Investors have not reacted positively to the Guitar Hero news, however, as early trading has depressed the stock price by over 7% from pre-earnings price levels. Activision closed at $11.69 before announcing earnings, and at last check shares were trading at $10.84. In addition to the “Guitar Hero” announcement, Activision also released its 2010 earnings today after hours. Revenues increased to $4.45 billion compared to $4.28 billion in 2009. This however missed analysts' forecasts and likely contributed to the 7% drop in after-hours trading.

Activision is responsible for the wildly popular Call of Duty video game which, in contrast to ”Guitar Hero”, is based on shooting people. This type of video game appeals to a broader demographic and also allows for new development whereas music-based gaming cannot really develop other than increasing the amount of songs available for download.

However, it begs the question: is now the right time to invest in the gaming industry? Analyzing both Activision and competitor Electronic Arts (NASDAQ: ERTS), they show very different characteristics. Activision has much better operating efficiency than Electronic Arts. On the other hand, Electronic Arts more than doubles asset use efficiency (as measured by the asset turnover) with .135 compared to .059 for Activision. Electronic Arts also uses more leverage than Activision which makes it a riskier company but with higher potential gains for shareholders.

Investors may consider a long position in either company; however Activision boasts a more modest forward P/E ratio of 14.08 whereas Electronic Arts' is over 21, suggesting that Activision may be the better deal. In light of the after-hours drop, it may be a great entry point for investors to dive in. However, further bad news for Activision was released this morning; it lost a bid to have the European Union reduce a fine that had been imposed on Activision resulting from an antitrust violation. Are there fundamental issues with the company's practice enough to deter investors? Or will today's open simply be a low point for value investors?

Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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