GameStop (NYSE: GME) didn't have a great third quarter. Total sales increased by slightly higher than 5%. On a GAAP basis, earnings dropped three pennies to $0.28 per share. If you exclude items such as debt extinguishment and foreign currency effects, then adjusted earnings per share on a diluted basis increased 19% to $0.38.

The bottom line may have increased by double digits by GameStop's calculation, but there are a couple reasons not to be too impressed by the performance. First, management missed the analyst's call by three pennies (this particular source is using $0.34 as an adjusted number, and comparing it to the expectation of $0.37). Second, and of higher importance to me, same-store sales decreased 1.8% during the quarter.

Now, it is true that the video-game retailer was cycling off a dramatic 46.3% increase in comps in the year-ago period, an expansion that was driven by Microsoft's (NASDAQ: MSFT) incredible Halo 3 phenomenon. I realize it was a difficult comparison. But there's no way that an investor can't be disappointed by that figure. The difference between positive 46.3% and negative 1.8% is rather sizable; I think management should have tried a little harder to deliver a number on the positive side of things at the very least.

The month of October was good to the Nintendo (OTC BB: NTDOY) Wii console. Actually, every month seems to be good to the Wii console. According to the latest sales figures, the Wii sold over 800,000 units during the Halloween season. Nothing scary about that.

Of course, Sony (NYSE: SNE) probably was a little spooked. The company's PlayStation 3 system came in a distant third to the Wii. Microsoft (NASDAQ: MSFT) probably felt all right. The Xbox 360 came in second place, fueled by a recent price cut. Believe it or not, you can actually get a video game system for less money than it costs to acquire a Wii. The Xbox 360 version without a hard drive goes for $199. Still, people are willing to pay a premium for casual gaming.

After I got through checking out the hardware sales, I wanted to see how software had performed last month over at Gamespot. I have to admit, I was pretty shocked to learn of the "conspicuously absent" Guitar Hero World Tour game. That bugged me because one of the prime reasons I own shares of Activision Blizzard (NASDAQ: ATVI) is the Guitar Hero franchise. However, one thing to keep in mind is that the title still has time to chart. It was released the last week of October, so perhaps the November rankings will be kind to it. Also, the new Call of Duty war adventure hit the street this week. Anecdotally, I know there's a lot of interest in that game.

Activision Blizzard (NASDAQ: ATVI), which competes with Electronic Arts (NASDAQ: ERTS) and THQ (NASDAQ: THQI), did all right in the third quarter. The publisher reported adjusted earnings per share of $0.07. That was two cents better than what analysts were counting on. As a shareholder of the company, I was pleased to see that. I was also pleased that a $1 billion stock buyback was announced.

However, I wasn't so pleased by the cautious tone of CEO Bobby Kotick. You can tell he thinks the recession may put a damper on all the rockin' fun that Activision Blizzard is having with its Guitar Hero franchise. Indeed, the market is pricing in the risk of owning Activision Blizzard shares these days.

Before, I was used to what seemed like a constant capital appreciation of my position. Now, that feeling is gone, as the stock has been struggling. The stock, in fact, was near a 52-week low at the close of trading on Wednesday. That doesn't feel right, does it? Activision Blizzard should still sell a lot of software for the Sony (NYSE: SNE) PlayStation 3, the Microsoft (NASDAQ: MSFT) Xbox 360, and the Nintendo (OTC: NTDOY) Wii platforms. Not only is the new Guitar Hero making waves, but a fresh version of Call of Duty is forthcoming.

Here's an idea for you: Disney (NYSE: DIS) should consider buying Electronic Arts (NASDAQ: ERTS). No, I didn't come up with the concept. It came from Martin Peers over at The Wall Street Journal (subscription required). Although this is an interesting idea, I can tell you that as a Disney shareholder, I absolutely disagree with it. In fact, I have to wonder if any Disney shareholder in their right mind could possibly be supportive of such an idea.

Buy EA? The author must have been kidding, right? Honestly, that would be one of the worst things that CEO Bob Iger could do. I really don't think it would happen, but then again, I never thought we'd see a hellish financial implosion based on a crisis of confidence precipitated by the popping of a housing bubble to end all housing bubbles.

Yep, strange days beget strange things, and the notion that the Mouse should invest in EA is perhaps one of the stranger beasts to walk Wall Street. Although the author does make a case that EA is cheap, I shudder to think about how Iger would possibly integrate the publisher into his conglomerate. Disney already has made significant investments in the video-game industry, and many of the games that the company releases are based on intellectual properties that have already been incubated in other parts of the business. Imagine if Disney had to deal with a larger, more complex pipeline, one that would obviously contain a lot of properties that could not be used in, say, the theme parks or by the movie studio. Personally, I think it would be a distraction to Disney.

There are some who say that video games will be just fine during the economic crisis. Of course, you have to consider who's spouting this idea when evaluating it. According to this article, gaming giants Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) believe that the upcoming holiday season won't be so tough on their PlayStation 3 and Xbox 360 consoles. They agree with some pundits who think that people will look to drop several hundred dollars on a system as opposed to spending even more on bigger-ticket items such as a vacation. If people cocoon in their homes during this terrible time period to save cash, then they may want to play video games. That's one dimension of the argument.

The other is that consumers may turn to escapist fantasies and casual diversions to take their minds off their problems. In this sense, video games are no different than the movie industry, which is supposed to be resistant to recessions. Again, companies like Disney (NYSE: DIS) and Time Warner (NYSE: TWX) make content that can immerse you in worlds that are different (and more fun) than the one you currently exist in.

Both arguments make sense. Many video games are like movies these days, so comparing them to the film industry is important. And video games definitely are cheaper than a trip to Walt Disney World. However, there are a few things to keep in mind when thinking about these concepts and making an investment decision. First, we are arguably in an environment that we've never seen before. The variables are so different these days. Who's to say how recession-proof movies are going to be, let alone video games? An Xbox 360 can be had for $200. So what if it's less than a trip to Mickey Mouse's castle? Consumers will still be aching. At the very least, if parents don't cut back in terms of buying Johnny a system for Christmas (and they may not, since parents oftentimes refuse to disappoint their kids during the season of Santa), then surely the households who already have one system installed will think twice about installing a second system (yes, many households have multiple systems).

THQ (NASDAQ: THQI), arch competitor of Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: ERTS), closed under $10 per share on Monday; $9.90 to be exact. It hit a new 52-week low of $9.30 intraday. I've got to admit, THQ under $10 a share sparks my interest.

I also must concede that my interest might be a bit on the irrational side to some degree. After all, I was a big fan of THQ during the time oh so long ago when all its cylinders were firing and the stock was a pretty cool investment. Now that it's hit the magical spectrum of single-digit, does that event alone changes things on a fundamental level? Am I just looking for a reason to buy a stock I once liked and praised?

As of late, problems have befallen THQ. Questions about the quality of its pipeline and delays of key video-game product have plagued the publisher. Indeed, THQ was a weakening company and a weak stock. Why invest in THQ when Activision Blizzard exists? There's definitely sound logic to such thinking. However, THQ is around book value at $10 per share. And the fact that THQ has some cool intellectual properties at its disposal (Destroy All Humans!, Saint's Row, etc.), as well as a cool licensing partner in Viacom (NYSE: VIA) and its Nickelodeon characters, means you've got to figure that the company might start becoming a value at some point.

I was a little surprised when I heard that the deal between Electronic Arts (NASDAQ: ERTS) and Take-Two Interactive (NASDAQ: TTWO) was called off. Yes, I had my doubts, but I thought that in the end, EA might raise its offer so that it could get its corporate paws on the Grand Theft Auto franchise. EA has been looking for ways to grow in a world where Activision Blizzard (NASDAQ: ATVI) is making waves with Guitar Hero and World of Warcraft. That company's stock has done well over the past year, while EA's has suffered.

EA may be walking away for now, but I'm not sure this is the last that we'll be hearing of Take-Two being in arbitrage play. Management clearly wants to sell the publisher. Thing is, it should have simply taken the offer it received earlier in the year. Now, shareholders will have to wait for another bid. Who knows when that will be, considering that it's been reported that software sales may be heading for a slowdown (I'm sure EA must have taken this into consideration when leaving the table).

But what does this mean for video-game investors? I believe investors should put Take-Two on a watch list and pray for the publisher's shares to drift down toward the 52-week low. I would not take a chance on the stock at these levels. Ideally, I would love to see Take-Two trading below $10 per share before buying. Right now the 52-week low is $13.53. Getting to single digits might be wishful thinking, but you never know the way this market is behaving. And considering that management passed up what was most likely a decent offer in the first place, one has to wonder if Wall Street might be in a punishing mood.

No matter what, Take-Two will be bought out. And if one could get in at a very low price, then the speculative risk/reward scenario might be attractive. EA might come back at some point, too. In fact, I expect the company to, although that is purely my own educated guess. I continue to own ATVI as my video-game play, but will be keeping my eye on Take-Two and its price action.

Disclosure: I own Activision Blizzard; positions can change at any time.

GameStop (NYSE: GME - option chain) shares are falling today after data from market researcher NPD group showed that U.S. video game sales growth is slowing. NPD reported that U.S. retail sales of video game hardware, software and accessories rose only 9% in August which is much less than July's 28% growth rate. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on GME.

This morning, GME opened at $42.08. So far today the stock has hit a low of $40.41 and a high of $42.08. As of 12:35, GME is trading at $41.32, down $1.38 (-3.2%). The chart for GME looks bullish and S&P gives GME a positive 5 STARS (out of 5) strong buy ranking.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in 5 weeks as long as GME is below $50 at October expiration. GameStop would have to rise by more than 21% before we would start to lose money. Learn more about this type of trade here.

GME hasn't been above $50 since May and has shown resistance around $46 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in GME.

Do you own Nintendo (OTC: NTDOY) in your portfolio? If you do, then watch out. According to Engadget, the latest Xbox 360 price cut from Microsoft (NASDAQ: MSFT) has been very successful, and it may wreak havoc on your position.

Engadget says that the sales data show a 100% increase in Xbox 360 sales during the first weekend of the new pricing structure. And this is important for those trading Nintendo. It's of course impossible to predict short-term stock movements, but I can tell you that I wouldn't be a buyer of the ADR's right now, not at these levels. As many have been saying, the game has changed now. It could be that this initial sales spike for the Xbox 360 won't last, and that the Nintendo Wii will still be king of the holidays. There's no question demand will remain strong for the Wii. It is a good system, after all, and it has a lot of brand momentum behind it. But now that consumers can get an Xbox 360 for less than a Wii (the former's low-end model can be had for $199 while the latter is still $250), and considering the fact that the Xbox 360 is technically superior to the Wii in terms of graphics power, I'd be pretty reticent about entering Nintendo's shares unless I saw a very significant pullback in price.

Nintendo is still going to make a lot of money (remember, it has the extremely popular DS hand-held powering it as well as the Wii), and Microsoft and Sony (NYSE: SNE) still have reason to fear the video-game icon. But if growth in the Wii slows, and if, heaven forbid, Nintendo needs to make a price cut of its own, then the stock could indeed reflect a more pessimistic outlook. It's a risk that needs to be carefully evaluated, since price elasticity may come into play here with a vengeance, especially during a softening economy. Like I say, I'd be uncomfortable considering Nintendo these days unless the shares get a price cut of their own.

Disclosure: I don't own any company mentioned; positions can change at any time.

Take-Two Interactive (NASDAQ: TTWO) is riding high on its Grand Theft Auto IV title. The popular game (big understatement) helped push the top-line during the third quarter to a better than 100% gain, coming in at $433 million. As for the bottom line, forget about it -- that was blown out of the water. On an adjusted basis, net income was 93 cents per share versus a loss of $0.62 in the year-ago period.

According to Briefing.com, this simply was far more than any analyst anticipated. The bottom line bested estimates by 39 cents! Most shareholders probably anticipated Take-Two going beyond Wall Street's expectations, but I'm not sure they thought that the publisher could pull such an order of magnitude off. Nevertheless, management believes that next quarter might not be as hot as first anticipated due to some timing issues. So they guided lower for Q4. This might explain, in part, the lack of excitement surrounding the stock at the close of the after-hours session on Thursday. The stock ended up with a 0.5% gain in price.

However, all is not lost. While Take-Two thinks Q4 might not be the best thing since sliced bread, it is confident that it will be able to go beyond the original outlook for the fiscal year. Take-Two says it will deliver between $2.08 and $2.12 in adjusted earnings per share for the year. Wall Street was counting on $1.81 per share for the fiscal year. With the stock trading around the $23 mark, this would imply that the shares could be cheap.

You know, I keep hearing about this Spore game. It's set to be released by Electronic Arts (NASDAQ: ERTS) to the Nintendo DS and to computer platforms later this week. There's been so much buzz surrounding it, and for good reason. Not only does it sound pretty neat and imaginative, but it was designed by Will Wright, the man who brought the world the Sim franchise. As I understand it, the player's goal is to guide a microbe through the process of evolution until it becomes a society blessed with enough intelligence so as to confer the capability of interstellar travel. Wild stuff, right? Remember, Wright is a genius, and the Sim games have certainly brought in a lot of dough for EA.

But how will the game be received? Is it too complex, too brainy for most gamers? Or, will Spore take the whole Sim concept into a new stratosphere of success? Are we witnessing the birth of a new, marketing-friendly super-franchise that will appeal to a broad demographic? Like I say, the buzz is strong. Yet, I didn't realize the title was coming out this week until I read this recent press release, which is using some celebrities to promote the game. Go figure, I guess.

I think Spore will be a hit, but I'm not sure it will be a big enough hit to move EA's stock back to its 52-week high, certainly. The publisher has such a deep portfolio of games, so this one title won't necessarily move the needle. But the celebration of Spore forced me to take another look at EA and wonder if the company's stock might be an interesting play ahead of the holiday season.

Investors have to find this frustrating. I know I hate it when this happens to one of my stocks. GameStop Corp. (NYSE: GME) issued its Q2 numbers today. The numbers were a thing of beauty for the most part. Yet, the stock goes nowhere. And yes, I know this is a bad market day, but still, I thought a little pop was in order. As it is, shares are down about 1% as I write.

Sales increased almost 35% to $1.8 billion. The bottom line saw an increase of well over 100%, coming in at $0.34 per diluted share. According to this article, expectations were for $0.28 per share. So, do you see where I'm coming from? Expectations were beat, and growth was stellar... come on, investors, give the stock a bid! Granted, the article mentioned something I noticed as well: the gross margin declined. Okay, it declined. But same-store sales simply rocketed like a spacecraft at a growth rate of 20% during Q2. That has to be worth something ahead of the holiday-selling season. Games from Electronic Arts Inc. (NASDAQ: ERTS), Activision Blizzard, Inc. (NASDAQ: ATVI), and Nintendo Co., Ltd. (ADR) (OTC: NTDOY) powered the quarter. And guess what? They're going to power the next two quarters, too. We have new iterations of Guitar Hero, Call of Duty, and Rock Band to look forward to. Oh, and Lego Batman. Seriously, don't discount that latter title. A lot of Sony Corporation (ADR) (NYSE: SNE) PlayStation 3s and Microsoft Corporation (NASDAQ: MSFT) Xbox 360s will move off shelves, and that little system called the Wii is going to be the hottest console again this Christmas. Oh, and then there's the DS. GameStop sells 'em all.

GameStop beat its own guidance, and I think it has a great chance of continuing to beat its own guidance in the near future. That aforementioned article mentions that investors are concerned with slowing growth in the video-game universe. Okay, point well taken, I suppose. But GameStop is such a great brand in its sector, and consumers have come to know it as the go-to place for entertainment software. And as hardware continues to become cheaper, and as the installed user base rises, GameStop should benefit. The shares haven't done well this year, declining over 30% on the year-to-date timeframe as of this writing. The stock is much closer to its 52-week low than to its 52-week high. It's weak. But, I also think it's cheap. If you have a long time horizon, you may want to check GameStop out. If you're a quicker trader, you may want to wait for the stock to come back about $5 toward its 52-week low (if that happens).

Disclosure: I own Activision Blizzard; positions can change at any time.

Can you believe the drama going on between Electronic Arts (NASDAQ: ERTS) and Take-Two Interactive (NASDAQ: TTWO) has dragged on for this long? I can't. According to this article, EA has let its current bid expire and intends on checking out additional stats behind the company in an effort to think more about what Take-Two has to offer and what its true value might be. The company behind the Grand Theft Auto series of mature-rated games is offering to give EA a presentation that includes non-public data.

EA really wants this deal. So does Take-Two. EA believes that it needs a super-franchise that goes beyond its sports dominance, and it feels that Grand Theft Auto would be one heck of an asset to own. It's true. EA would probably benefit from the title, and it might get the company's stock out of its current doldrums. And in a world where Activision Blizzard (NASDAQ: ATVI) is benefiting greatly from an acquisition and a merger -- Guitar Hero and Vivendi Games, respectively -- one cannot blame EA, I suppose, for keeping the dream alive.

EA is in something of a bad spot because, at this point, it probably will have to raise the bid on Take-Two. I think the market will ultimately be disappointed if EA doesn't get Grand Theft Auto (and BioShock, for that matter). It will be perceived as a failure on management's part, and shareholders will wonder where the growth will be coming from, and what catalysts can be counted on to drive the stock price higher in this tough economic environment.

No, you're not surprised. Nintendo (OTC: NTDOY) moved the most video-game consoles in the U.S. in July. According to this Bloomberg article, which cites monthly data supplied by market-research firm NPD, gamers purchased over 550,000 Wii systems. Sony's (NYSE: SNE) PlayStation 3 was snapped up by almost 225,000 players, and Microsoft's (NASDAQ: MSFT) Xbox 360 sold about 205,000 units.

There's no question about it now -- the Wii should dominate the holiday season. Momentum is behind the company's strategy of creating products that appeal to casual gamers. I'd be shocked if the fad all of a sudden burned itself out, although Douglas McIntyre did write recently about the possibility of Nintendo running out of steam at some point. The Wii Fit exercise system was the second best-selling software title in July. That property is definitely helping drive Nintendo's fortunes.

In other software statistics, Electronic Arts (NASDAQ: ERTS) was number one with NCAA Football '09. Activision Blizzard (NASDAQ: ATVI) came in third with its version of Guitar Hero for the Nintendo DS handheld unit. EA should come out on top again next month since the new iteration of its Madden franchise came out earlier this week. There was a lot of excitement over that game, as there traditionally is every summer.

You honestly have to wonder what Sumner Redstone, the chairman of both Viacom (NYSE: VIA) and CBS (NYSE: CBS), thinks about Midway Games (NYSE: MWY). The guy has a huge investment in the struggling software publisher. He owns something like 87% of the company's shares. He controls Midway. I mean, does he look at the performance of this business? Does it make him angry? Confused?

Anyway, Midway reported earnings for the second quarter earlier in the week, and as usual, they weren't the stuff of Wall Street dreams (see more earnings news), Revenues declined 26% to $23.4 million. The publisher lost $0.29 per diluted share on an adjusted basis. Last year at this time the loss was $0.12 per diluted share on an adjusted basis. That's horrible. For Q3, management expects an adjusted loss of $0.27 per diluted share. Midway is excited about its upcoming Mortal Kombat vs. DC Universe title, to be released in time for the holidays. I'm not excited. Will the game be enough to propel the stock, which closed on Wednesday at a bargain price of $2.66, higher? I use the phrase "bargain price" sarcastically, of course.

I've often wondered about the Midway dilemma. What can this company possibly do to improve itself? Should Redstone order management to look for better synergies between it and the Viacom/CBS content library and/or platforms? Midway has worked with MTV before on promoting a few titles. It's too bad that Midway doesn't have access to some of the popular characters of the Nickelodeon channel. THQ (NASDAQ: THQI) currently has that license. I'd have to believe that good ole SpongeBob SquarePants would have helped things out.