Southwest Securities Downgrades Electronic Arts
Southwest Securities downgraded Electronic Arts (ERTS ), Activision (ATVI ), THQ (THQI ), and Take-Two Interactive Software (TTWO ) to neutral from strong buy.
Analyst Arvind Bhatia says he expects U.S. video game software industry will begin to experience: 1) slowing revenue growth; 2) higher R&D costs; 3) flat operating margins; 4) slowing EPS growth; and 5) multiple compression. He says this thesis assumes that the video game industry will be in transition next year based on belief Xbox 2 will be released in the fall of 2005 followed by PlayStation 3 in early to mid-2006 and Game Cube 2 in fall of 2006.
In anticipation, Bhatia recommends investors begin reducing exposure, especially if these stocks strengthen in the near term (due to strong holiday season).