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Can video games weather the economic storm?*

October 3, 2008 |  8:24 am

The swoon in video game shares this week, as with the rest of the stock market, can make any investor queasy.

Activision Blizzard has seen more than $4 billion in market value vanish so far this week, or close to a quarter of the Santa Monica company's value. Electronic Arts has lost more than $2 billion. What's more, the video game sector has dropped further than the overall market. The following are the stock performances of select game companies from Friday, Sept. 26 to today's close, as compared with the Nasdaq:

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Theories abound about why game companies are suffering worse than the broader market -- and calling into question the notion that the sector is recession proof because it provides more entertainment bang for the buck.

One explanation is that no good deed goes unpunished. ...

... The vast majority of game stocks, more than 90%, are held by institutions such as hedge funds and mutual funds that are attracted by the sector's strong sales growth. When the market collapsed Monday, hedge funds investors sought to minimize their losses and cash out, said one hedge fund investor who declined to be identified. Mutual funds also dumped game stocks to take their profits sooner rather than later.

Panic is another explanation. "Sell first, ask questions later," said Michael Pachter, an analyst with Wedbush Morgan Securities. "It's an insane overreaction."

Games are also caught up in the hand-wringing over the retail sector. With as much as 40% of video game sales occurring during the last three months of the year, a collapse in consumer confidence at this time could have a disproportionate impact.

"Consumers are going to be very value conscious," said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. "This means you have to produce killer titles or it's going to be a rough Christmas for you."

Kyser said games, while vulnerable, can still do well if consumers switch away from more expensive forms of entertainment, such as theme parks and live sports events. "People are looking for alternatives," he said. "With video games, you can play it again and again."

Analysts remain bullish on the industry. Pachter projected that worldwide sales of games and consoles would grow 23% this year from 2007 to just over $50 billion.

"We're still going to spend the same amount of hours entertaining ourselves," Pachter said. "It's just a matter of which entertainment we choose to buy, and games is still perceived to be a super value."

-- Alex Pham

* This post was updated with Friday's closing stock prices.

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