Electronic Arts leads rally among game stocks

Wedbush Morgan analyst Michael Pachter put a tiger in the tank of game publisher Electronic Arts this morning with a pre-bell memo that alerted investors to his upgrade of the stock.

Pachter's 5:18 a.m. memo drew on a list of theories, ultimately concluding with all the words that investors needed. "We are ... raising our price target from $61 to $66, and are upgrading the stock from HOLD to BUY."

Pachter's new rating reflected his view that EA was the best prepared among the major publishers to take advantage of the upcoming Xbox 360 launch, in addition to its continued strength behind the PSP. Furthermore, the company could benefit from "a potential price cut for the PS2," which Pachter sees looming.

"We believe that Electronic Arts' portfolio of content is the deepest in the industry, and the company has continued to add to that content and leverage new products and sequels to older products," Pachter said in his morning memo to investors and to the industry. "We believe that the company is well positioned to maintain or increase its market share over the next year, and we anticipate that consensus revenue and earnings estimates will be revised higher."

Pachter said shares of EA could surge as much as 20 percent within the next year. Pachter sees short-term growth as well, predicting the company will deliver higher-than-anticipated revenues. "We think it is likely that Electronic Arts will deliver upside to its revenue guidance for the quarter, with US sales flat to up $20 million, and international sales down $50–65 million. At worst, we envision the company delivering revenues of $650 million, well above the consensus estimate of $625 million."

A minor bombshell in the memo was Pachter's hypothetical that sees Sony dropping the price of the PlayStation to $99. The reasons? Fierce competition between the two console makers, Sony and Microsoft. "We believe that Sony is in a game of brinksmanship with Microsoft, and expect the company to cut the PS2 price to as low as $99 in advance of the launch of the Xbox 360."

But Pachter doesn't stop at his already growth-packed picture of the future. "Should our expectations come to fruition, we should see the company deliver ever higher earnings over the next several years, with earnings growth and multiple expansion driving its share price significantly above our $66 price target."

ERTS closed today up $2.97 (5.29 percent) to $59.06, on volume almost double the usual 3.7 million shares.

Other game stocks also performed well today. Activision shares gained nearly 2 percent, closing at $22.53; Take-Two Interactive shares went 2.3 percent higher to close at $22.36; and THQ shares saw a 2 percent gain, closing at $23.02.