Market Games

Kelley is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This week has already been a big week for video games and it's only Wednesday.  With Zynga's IPO set for Thursday and the announcement of record-breaking sales of Activision's (NASDAQ: ATVI) Call of Duty: Modern Warfare 3, things are getting interesting.

But weeks like these always make me wonder if Wall Street really knows what to do with companies whose primary source of revenue is people obsessively playing video games. Zynga and Activision are two very different companies that focus on two very different audiences but I think both will see their shares suffer due to fact that a) most of their consumers don't invest (e.g. teens) and b) most investors don't seem to appreciate the gaming business. Zynga's situation is complicated due to the IPO, so the company I'm going to focus on is Activision. We will have to wait and see if Wall Street is any kinder to Zynga.

I would like to be very clear, I do not expect investors to be consumers of everything they invest in. In many ways, being a big fan of a company's products or services may put you in a precarious investing position. I do, however, think that there are times when Wall Street is a bit out of touch because investors are often older and not tuned in to the trends of a younger generation. Investors seem to be okay with companies like Microsoft (NASDAQ: MSFT) filling in revenue holes with gaming console sales, but it is almost as if the market has ignored the sales strength exhibited by Activision.

Since it's new Call of Duty game was released a little more then two weeks ago, the company has raked in a record 1 billion in sales. Now, one might think that this would have some effect on the companies stock price, right? Well, the stock did hit a high note of $14.40 on November 8th (the game's release date) but since then the stock has fallen back down to the $12 range. The stock has a 52-week range of  $10.40 - $14.40, but is $14.40 really all it could muster? I recently read an article in which the author stated the reason the stock has been doing poorly since the release was due to the fact that the success of the new Call of Duty was "priced in" to the stock. Who "priced in" 1 billion in sales after only 16 days?! Last year's release took two months to reach the 1 billion mark. I think the real reason behind the price drop is that investors don't know what to do with this kind of profit being made in video games, they look at P/E ratio north of 18 and start to wonder how long the trend will last.

I can understand and support investors sticking to what they know. Investing in companies that produce and sell video games is not easy; it is a business that ebbs and flows and it is often based on trends that are difficult to keep up with. My only caution is this: the market is changing and so are the players, and, while many of us spent our free time as teens watching TV, many future investors are spending their free time playing COD.

Kelley Ryan owns shares of Microsoft but none of the other stocks mentioned in this post.  She has no plan to buy or sell stocks mentioned here in the next three market days.

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