Shares of Electronic Arts (Nasdaq: EA ) rallied last week on buyout speculation, but gravity is getting the better of the meandering video gaming bellwether this time around.
S&P Capital IQ analyst Jim Yin downgraded the stock yesterday. He feels that the stock's been moving sharply higher on buzz for an acquisition that's unlikely to happen.
It's easy to see why a buyout is unlikely. The video game industry is getting crushed. GameStop (NYSE: GME ) slashed its comps outlook last week, just as the video game retailer has done during most of the past quarters. Take-Two Interactive (Nasdaq: TTWO ) is the only traditional gaming software company expected to posted healthy top-line growth this fiscal year, and that's all hinging on its ability to put out its new Grand Theft Auto game on time.
Video game hardware and software sales have been falling consistently since 2009. Digital delivery is where the market's at, and the free or nearly free casual gaming options being cranked out by Zynga (Nasdaq: ZNGA ) and its smaller rivals are apparently more than enough to entertain mainstream gamers.
EA has bought its way into digital gaming relevance, but is it enough? Its traditional console franchises show no signs of bouncing back. EA's big splash into Activision Blizzard's (Nasdaq: ATVI ) massive multiplayer online gaming arena sputtered when diehard gamers tired quickly of Star Wars: The Old Republic. Yin believes that EA will have no choice but to kill the Web-based game if cancellations continue to mount.
EA's one bright spot has been social gaming, but there's a reason why Zynga's trading for a sliver of its IPO price.
Yes, EA is cheap enough to attract buyout interest, but any smart buyer would wait a few quarters to get any gaming company at a lower price.
Last week's chatter didn't make a lot of sense. It's comforting to know that a Wall Street analyst also sees it that way.