Option implied volatility (IV) on the video game software company Electronic Arts (NYSE:ERTS) rose slightly to 49% on Monday on the news that the company was buying a London-based social network game company called Playfish. Gosh, IV fell back to 40%. Implied volatility is widely believed to be informationally superior to historical volatility, because it is the "market's" forecast of future volatility. Higher the volatility higher is the chance of an upside or a downside on a stock and its option. Lower volatility on ERTS options implies that the investors are not enthused about the stock. A month or two back the stock's fortunes seemed changing for the better, but now it looks gloomy – why is that so? Can the stock bounce back?
What ails ERTS?
On September 23, 2009, Electronic Arts jumped more than 8% on unsubstantiated talk that Microsoft may want to buy the video game publisher. The next day, a Microsoft executive said there were no plans to acquire Electronic Arts.
Additionally the company's second quarter performance was disappointing. Sep-Q loss of $1.21 (2009) vs. loss of $0.97 (2008) is wider than analysts' consensus loss estimate of $0.465. Revenues fell 12% to $788 million, but were above the analysts' consensus forecast. However, higher-than-expected revenues were offset by lower gross margins and higher marketing costs. ERTS announced plans to cut 1,500 employees, or about 17% of its staff. The company is likely to restructure units engaged in Black Box, Redwood Shores, Tiburon and Mythic, and it is also likely to close 'several' facilities down entirely. However, the company is upbeat about the success of FIFA 2010, Madden, NFS Shift and Dragon Age Origins. Given the magnitude of the cut, I think the weakness in the video game industry is due to factors other than just the economy.
Is the video gaming market shrinking?
In 2006, global consultancy PricewaterhouseCoopers (PwC) predicted that global video game market could grow to $46.5 billion by 2010, at an average 11.4% compound annual rate. The US market was estimated to reach $13 billion in 2010, lagging Asia Pacific and the combined region of Europe, the Middle East and Africa. In the Asia Pacific market, wireless and online games were expected to grow at 23% compounded annually with online games reaching $4.4 billion and wireless reaching $4.2 billion by 2010.
Viewed in retrospective, in 2008, global video game market outperformed PwC prediction by reaching $51.4 billion in 2008. And, now the revised estimates suggest that the global video game market could grow to $73.5 billion in 2013 (a 7.4% compound annual rate).
