Gather 'round, Madden, Sims, and Battlefield fans. Your software developer needs you. Electronic Arts (Nasdaq: ERTS ) has announced that it will miss its top- and bottom-line targets for the rest of fiscal 2006. Holiday sales aren't up to snuff, and it's unlikely to get any better during the March quarter, when credit cards are maxed out.
EA has abandoned its November projections, which called for fiscal-year earnings between $1.45 and $1.60 a share, and revenue between $3.25 billion to $3.4 billion. Is it bad news? Clearly. Are you shocked? You shouldn't be.
EA shares dipped slightly in after-hours trading last night, just as Activision (Nasdaq: ATVI ) took a hit when it produced a similar warning last week. EA CEO Larry Probst sees the entire video game industry taking a double-digit percentage hit compared with last year's December-quarter levels. It's pointless to expect a bellwether like EA to be immune to the malady.
There may always be some small developer tearing it up on a hit title when the rest of its peers are sputtering -- like Take-Two Interactive (Nasdaq: TTWO ) a few years back, when the Grand Theft Auto franchise was taking off -- but an industry leader like EA is unlikely to shake off the current slump.
Why is the industry down in the dumps? Put yourself in a diehard gamer's shoes. Your holiday wish list probably includes a video iPod or an Xbox 360 from Motley Fool Inside Value pick Microsoft (Nasdaq: MSFT ) -- gadgets that will set you back as much as $400. Do you still have the money to burn to build out a new game library right away?
Now, suppose that you're the gamer who didn't manage to snag an Xbox 360. You know that the PlayStation 3 and Nintendo Revolution consoles are coming out next year. The last thing you're likely to do is buy more games for your old machine. Sure, the old games may still work with the new systems, but a gamer is unlikely to settle. It's why the video-game console makers try to keep their next-generation launches under wraps for as long as possible.
My advice to those owning EA today -- or looking to buy in -- is to approach this short-term lull as an opportunity to establish long-term positions in the software publishers that excite you. EA and Activision are both Motley Fool Stock Advisor recommendations, and this temporary shortcoming shouldn't change their long-term fundamentals.
"I'm just suggesting that investors should be on the lookout for falling software developers with what is likely to be a dud quarter or two," I wrote last week. Just like that, it's raining video-game developers.
Enjoy the deluge.
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Longtime Fool contributor Rick Munarriz is old enough to remember playing on an Atari 2600 before it became a relic. He does not own shares in any of the companies in this story.
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