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Could Activision Blizzard Be the Next to Fall?


The fourth quarter was a mixed bag.

If there was any doubt that there's a bear market in video games, software giant Electronic Arts (ERTS) and retailer Game Group erased it by cutting earnings guidance.

The problem is simple: People are strapped from the economy, and the industry is still hung over from the music game/Wii booms.

We've already seen GameStop (GME), Take-Two Interactive (TTWO), and THQ (THQI) report lousy results and/or cut guidance, and Electronic Arts has been in a multi-year decline in earnings expectations. So it's tough to call the past two days' lousy news a surprise.

But it does raise a question: Is Activision Blizzard (ATVI) the next to fall?

Unlike its competitors, Activision did fairly well for most of 2009, meeting or beating earnings estimates for each of the first three quarters. Its main defense against industry weakness has been its reliably selling blockbuster franchises like Guitar Hero, Call of Duty, and World of Warcraft.

The fourth quarter, however, may have been a mixed bag. November's Call of Duty: Modern Warfare 2 has been a monster hit, grossing over $550 million at retail in its first five days of release -- enough to crush any movie opening in history. Unlike lesser games, it still sells at full price at many retailers, and if history has been any indicator, it should be moving units for many months to come.

Unfortunately, the success of Call of Duty game was the only sure thing for the industry last year.

Music games, such as Electronic Arts' The Beatles: Rock Band, and Activision's own critically-acclaimed DJ Hero were early disappointments in the fall. Despite the downturn in music games, stores have been overstocking these expensive games for seemingly no reason other than to fill up space. This is a massive turnaround from 2006 and 2007, when new Guitar Hero games couldn't be kept in stock, period.

The Tony Hawk skateboarding series also saw its newest iteration bomb with gamers. The $120 Tony Hawk: Ride, which included a goofy skateboard peripheral, quickly stalled out as critics slammed it for its awkward game play and high price tag.

Call of Duty
may have been strong enough to offset Activision's weak spots during the fourth quarter, but there's no denying that there are a lot of moving parts here. And having too many moving parts is one of Electronic Arts' biggest problems. This is why I recently bought puts to hedge my Activision stock position -- there's just no sense in assuming my egg's the only one that's not rotting. Better safe than sorry.
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Position in ATVI.
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