Video games continue to expand as a favorite past time.  The average gamer is now 37 years old, showing us that video games are growing more and more popular with adults while 42% of players are female.  Video game companies have finally achieved their goal, get more adults and women playing video games.  Easily one of the most successful video game companies of the last few years has been Activision with its gold mine, Call of Duty series.  The Call of Duty franchise has set opening day records and broken its own records, it seems, every time a new Call of Duty comes out.  Another cash cow Activision has is its World of Warcraft franchise that continues to be popular and rake in money for the company.

With Call of Duty and Warcraft, Activision has 50 million customers with just these two alone.  That’s how they were able to rake in $880 million in 2011.  In return, Activision returns most of its earnings back to shareholders in the form of dividends and buybacks.  In 2011, revenue was a little sluggish but earnings per share were up double digits.  With these great earnings and Wall Street firmly giving the stock a “buy” why has the stock performance been so dismal?  Investors are worried that Call of Duty could be the next Guitar Hero in that it was once a hot game but now bust.  On top of that, free online games are gaining hold, threatening game retailers’ profits.

Logo of Activision blizzard

The last Call of Duty was not as big of a hit as the one before, making investors worry that the best is over and that Activision must find other sources of revenue.  For video game companies it is hard to find the next big and in some cases they may never find that hit again.  With online games catching on and people finding cheaper ways to play games, Activision must find the next hot game before it takes a huge hit on earnings.

Just look at EA Games’ Medal of Honor (similar to Call of Duty however it can before), it was once a popular game and a real hit.  Then competition came along (Call of Duty) and now the Medal of Honor hasn’t had a hit in years.  Now a similar phenomenon has occurred.  Call of Duty is lately getting hit from Battlefield.  A new up and coming series that is starting to gain ground on Activision’s classic.

The video game industry as a whole is facing difficult times.  The economy is rough and people are looking for cheaper ways to play games.  Activision in particular could be at the tail end of its cash cow’s dominance and could be taking an earnings hit if they do not figure out how to find the next big thing in video games.  I would avoid all video game stocks until the economy improves and more popular games take hold.