September song: Video games outperform

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Yahoo! Inc. and TiVo Inc. were some rare holdouts last month as the Nasdaq surged, with new-media stocks -- video games in particular -- largely outperforming.

During a September investor conference, Yahoo! executives said third-quarter revenue would come in at the low end of guidance, a revelation that knocked the stock down 12.3% by the time the month ended, even though many Wall Street analysts defended the stock.

Jordan Rohan of RBC Capital Markets called it his fourth favorite in the online advertising space, behind Google Inc., up 6.2% on the month, aQuantive Inc., down 4.8%, and VoiceClick Inc., up 5%.

Bear Stearns analyst Alexia Quadrani said Yahoo!'s "disappointment" had provided "a good entry point to a rare double-digit growth story on the winning end of the secular trends impacting media." Translation: There aren't too many other media companies that offer 24% revenue growth this year compared with 2005.

Likewise, Leland Westerfield of BMO Capital Markets recommended clients buy the stock, especially because its new online search product called Panama, due out next year, ought to be a big hit. "A successful implementation of Panama will outweigh all other prevailing investor concerns," he wrote, predicting Yahoo! shares will hit the mid- to high-$30 range in 12-15 months. They closed last month at $25.28.

TiVo's problem was a lack of positive (or any) news flow concerning its court victory over EchoStar Communications, as well as the company's decision to dilute its shares with a secondary offering of 8.3 million shares.

TiVo already had $75 million in the bank, and the new offering will net it about $67.4 million more, leaving some investors curious as to what TiVo might need the additional money for.

Susquehanna Financial Group analyst Michael Kelman said the firm was simply "being opportunistic given the recent strength in TiVo's stock price," noting that before the announcement, TiVo shares had advanced 25% in three weeks. The stock, though, ended down 8% on the month to $7.59.

TiVo shares got a slight lift toward month's end on speculation that Amazon.com Inc. might use TiVo to move downloadable feature films on its new Unbox product from computer screens to TV screens.

"A deal between Amazon and TiVo would be positive for TiVo," Citigroup analyst Tony Wible said in reiterating his $14.50 target on TiVo shares.

Amazon's revelation of its Unbox last month, along with Apple Computer's. unveiling of its iTunes downloadable movie store, was largely viewed as positive for Netflix Inc., because Wall Street seems in agreement that these new downloadable initiatives won't hurt the DVD business any time soon.

"There are still legal, technical and economic hurdles, in our view, that need to be cleared before Internet downloading will become a more prevalent distribution channel," Wible said.

Citigroup analyst Mark Mahaney said of Unbox that "the technology and usage requirements require a lot of patience, even for technology buffs."

And JPMorgan analyst Barton Crockett upgraded Netflix shares to "overweight," arguing that investors had been overly fearful of video-on-demand and Internet downloading.

Netflix shares advanced 13.8% during the month to $22.78.

Video games were the standout though, as investors set their sights on a robust Christmas season and on next month's launch of the Nintendo Wii and of the PlayStation 3 in the United States.

"Finding a PS3 this holiday will be an impossible task," Susquehanna analysts predicted, primarily because of production problems and the lengthy list of consumers who have preordered the console. "Logging into eBay and setting the bid above $1,000 appears inevitable."

Shares of Electronic Arts Inc., which boasts August's hottest-selling game, "Madden NFL 07," rose 9.4% last month, while shares of THQ Inc. were up 13.1%, Take-Two Interactive Software Inc. shares were up 16.9% and Activision Inc. shares were up 17.1%.

According to data released last month from NPD Funworld, dollar sales related to hand-held games rose 24.2% in August compared with the same month a year ago while console dollars rose 15.8%.
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