Analysts see upside as consoles near release

Three publicly traded game publishers came in for upgrades from three different analysts today. American Technology Research analyst PJ McNealy upgraded Take-Two Interactive Software, Inc. from Hold to Buy. PiperJaffray's Tony Gikas upgraded Electronic Arts from Market Perform to Outperform. And Citigroup analyst Elizabeth Osur upgraded Activision from Sell to Hold.

Each analyst had his or her own reason for their upgrades. Gikas seems genuinely unimpressed with the inner workings of EA as motivation for his upgrade. Instead, he refers to the math, concluding nothing more than the next generation is upon the industry and EA has nowhere to go but up.

"In our opinion," Gikas said in a memo sent to investors yesterday, "the company's valuation has become more attractive and the next cycle is at hand." He reminds readers that shares of Electronic Arts have declined 20 percent year-to-date, as well as underperforming against the Standard and Poor's 500 benchmark by 30 percent during the past six months.

The news did little to budge EA on the Nasdaq. Shares of the company lay close to comatose today, up 36 cents to $42.88 and less than a dollar off its 52-week low.

McNealy based his upgrade on the news that Take-Two's Grand Theft Auto IV is slated for simultaneous release on both the PlayStation 3 and Xbox 360--contrary to the usual exclusive PlayStation release for GTA titles.

McNealy was also influenced by the stock's recent poor performance, recognizing value in a stock that has lost 23 percent of its value over the past six weeks. But his upgrade didn't exactly shake the markets today--Take-Two budged northward a full penny in trading today.

Finally, Activision's regrade to Hold sent shares in that publisher down 16 cents to $12.07, inching closer to the company's 52-week low of $11.33. Trading was heavy in Activision shares: Some 13.1 million shares traded hands today versus the three-month average of 5.2 million shares, indicating many a trader was shifting in or out of the stock with vigor.

Today's upgrade of Activision by Citigroup follows a May 5 upgrade from Buy to Strong Buy at Wedbush Morgan, and an upgrade at Bear Stearns from Peer Perform to Outperform. Reportedly, Osur based her upgrade today on the company's recent acquisition of the James Bond license. Activision has the right to develop Bond-licensed games through 2014.

Going forward, upgrades to other stocks from other analysts are likely, given the impending release of the Nintendo Wii and PlayStation 3. Gikas speaks to the entire industry when he says, "Similar to previous cycles, we expect video game publisher earnings to ramp dramatically during the first years and expect valuations to follow."

Those "first years" start in earnest in just a few short months.