Don't act like you were surprised when Activision (NASDAQ:ATVI) warned that video game sales were coming in lower than expected. Sure, the market didn't see it coming -- the stock took a 14% hit in after-hours trading last night -- but you had to feel that this would be a rough few months for the video game industry.
With the Microsoft (NASDAQ:MSFT) Xbox 360 in short supply, and the next-generation consoles from Nintendo and Sony (NYSE:SNE) just months away from hitting the market, did anyone really think that gamers would load up on software titles for current platforms, rather than save up for a library of next-generation titles?
Electronics have been big sellers this holiday season. Everything from iPods to iDogs are in short supply in some cases. Video game developers are probably doing fine in the handheld segment, with PSP and Game Boy titles selling briskly, but there's just no such urgency on the console side at the moment.
Six weeks ago, Activision was guiding investors to expect $0.52 a share in profits and $1.48 billion in sales for fiscal 2006 (which ends in March). Three months earlier, the company figured that it would produce a profit of $0.69 a share in fiscal 2006. Now it's letting some more air out of the prognostication balloon.
The company didn't spell out the actual shortcoming. It only stated that earnings will be "significantly lower" than its most recent outlook. So what's an investor to do? You can always grab Activision by the wrists and shout, "Hey Activision, you should have quit while you were behind!" But the satisfaction of the diss will be fleeting, especially with a company that has just hosed down its profit targets in back-to-back months. So what do you?
Consider buying more.
No, I'm not saying this just because the stock is an active Motley Fool Stock Advisor recommendation. I'm just trying to be opportunistic. Is Activision a damaged company? Hardly. Its latest Tony Hawk, True Crime, and Call of Duty installments just came out. I'm waiting until Christmas morning to crack open GUN for the Xbox 360 and see whether Activision's next potential killer franchise lives up to its considerable buzz.
With the video game industry in for a dud quarter or two, I'm suggesting that investors should be on the lookout for falling software developers. Have you always wanted to own fellow Stock Advisor pick Electronic Arts (NASDAQ:ERTS), but felt it was too richly priced? Fancy the handiwork of THQ (NASDAQ:THQI), Atari (NASDAQ:ATAR) or Take-Two Interactive (NASDAQ:TTWO), but don't want to overpay for their shares?
Stick around. Maybe some software players will buck the trend. Maybe some have already discounted the temporary apathy. In any case, the lull will be temporary. If Sony and Nintendo are able to get their new systems in place well before the holiday selling season, and Microsoft is able to keep Xbox 360 production channels fluid, the warnings of the 2005 holiday season may be reversed into upward surprises in the latter half of 2006.
Sure, it doesn't look pretty right now. It may not look pretty for a while. But give it time. The game's not over yet.
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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. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
