Gaming Software Stocks: Analyst Cuts Rating on Take Two, THQ

Paul-Jon McNealy, an analyst at American Technology Research, on Tuesday cut his ratings on THQ (THQI) and Take Two (TTWO) to Hold from Buy, citing valuation.

“We believe that the video game publisher group has had a significant move, up on average 53% since July 10, and we believe that most of the good news for the upcoming hardware launches is currently reflected in the share pricing,” he wrote today. “Our macro level theme has been that in July, sentiment swung positive, and investors began buying the video game publishers ahead of the launches of the Nintendo Wii and the Sony PS3 next month. We don’t anticipate that there will be another sentiment swing - this time to the negative - but that some investors may become a little more cautious and sell on strength rather than aggressively building positions at these levels. We believe that expectations for the launches of Wii and the PlayStation 3 are now reflected in share prices.”

On THQ, McNealy notes that the stock rose 60% since early July. He expects the company to beat current September quarter estimates at both the top and bottom line. But the stock isn’t cheap. To turn more bullish, McNealy says, he would need to see a lower valuation or “a change in fundamentals,” in the form of new titles, revival of old franchises or “M&A action.”

On Take Two, McNealy points out that the stock has run up 71% since early July. He notes that the company faces both ongoing SEC issues and “uncertainty” in its publishing schedule.

McNealy maintains his Buy ratings on Electronic Arts (ERTS) and Activision (ATVI).