COMMENTARY -- If you didn't get into Electronic Arts (Nasdaq: ERTS) before last night's fiscal third quarter report, you've already given up some decent gains.
Shares of the game software industry's UberCompany gained gained more than 18 percent, a remarkable performance on the surface considering that Electronic Arts yesterday said, in so many words, "Our revenue won't move for the next six months."
Game software investors have a reputation for short-term thinking, but they're pretty good at anticipating trends. They didn't wait for lousy Christmas figures; instead, they murdered game software stocks last fall, before PlayStation 2 even debuted in the United States and Europe.
In bailing out of the game market at the earliest signs that Sony (NYSE: SNE) wouldn't going to ship as many PlayStation 2 machines as rapidly as hoped for the Christmas season, Wall Street priced gaming stocks for maximum disappointment.
You could say Electronic Arts delivered on that expectation. The company in its third quarter fell short of pessimistic revenue estimates, let alone more hopeful ones. Executives also slashed their targets for the fiscal fourth quarter.
And just as Wall Street quickly abandoned ERTS back in September ahead of the initial holiday disappointment from PlayStation 2, the market quickly ran back to ERTS the moment company executives pointed to a powerful second half of calendar 2001. Within an hour after the Nasdaq opened today, ERTS had shot up almost 20 percent.
Wall Street senses the worst is over. Sony may have whiffed badly on its target of 2 million new PlayStations in the United States by the end of December, but by March things will hardly be different from the company's initial forecasts.
"The underperformance in the fourth quarter was magnified tremendously because it all happened up front, and there was a such a small installed base for PlayStation 2," Wedbush Morgan Securities analyst Miguel Iribarren said last night. "The underperformance is much less pronounced going forward."
Sony expects to have 9 million PlayStations shipped by the end of March to North America and Europe. That's not far from the company's previous goal of 10 million.
By the second half of this year, there will be a huge PlayStation 2 base. It may even be larger than people thought as recently as last week, given Sega's recent decision to abandon the Dreamcast.
No one is in a better position to capitalize than Electronic Arts, which already commands an estimated 44 percent of the PlayStation software market. The company also has great prospects in PCs, other planned platforms such as Xbox from Microsoft (Nasdaq: MSFT) -- EA was the first big game name to announce Xbox development -- and online, through EA.com.
Electronic Arts management hasn't given anyone reason to doubt its ability to handle the surge. If anything, the recent slow period bolstered confidence in the company's top brass; not many companies can boost revenue 6 percent in such a slow period. "The quarter just reported was a good one given the low sales levels," Pacific Crest Securities analyst Jeff Goverman writes in a research note released today. "The balance sheet was not stretched to make the quarter."
The only real question is: can a strong position can translate into stock gains? ERTS for the past year has traded in a fairly narrow range, compared to most Nasdaq stocks. At this afternoon's price, shares are less than 10 points away from their 52-week high.
But investors since 1999 have been waiting for the next console transition. Now it's happening, and should continue into next year as Xbox and Nintendo's Gamecube emerge. Electronic Arts has come out of every previous console shift stronger than ever on the top and bottom line, as well the stock price.
I know, I know: past performance never guarantees future results. The contest doesn't always go to the biggest or strongest.
But that's the way to bet. 22GO>