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Netflix delivered a sobering warning to the world of entertainment last week. In its letter to shareholders, the company said, “We compete with (and lose to) Fortnite more than HBO.”

Fortnite is the gaming phenomenon that has addicted teenagers and aggravated their parents. If Netflix (ticker: NFLX) is worried about Fortnite—owned by privately held Epic—that doesn’t bode well for traditional gaming companies. Fortnite has stolen the gaming spotlight from Electronic Arts (EA) and Activision Blizzard (ATVI), which are both down nearly 40% from last year’s highs. And while the selloff might make them attractive for the long run, the two largest independent U.S. game publishers are likely to be dead money in the year ahead.

The main issue is an underperforming pipeline of games. Last November, Activision Blizzard gave disappointing earnings guidance and admitted that Destiny 2, one of its key games, had underperformed expectations, sparking a 12% stock drop the following day. Another earthquake came this month, when Activision said that it would transfer the publishing rights of the Destiny game franchise to its developer, Bungie, driving the shares down 9% the next day.

Bernstein analyst Todd Juenger wrote last week that Destiny’s sudden drop-off was a sea change for the bull case around the company. He observed that, when the franchise’s first game was released, it broke records as the biggest original intellectual property launch in history.

“Four years later, it has gone to zero [for Activision],” Juenger wrote in a note on Wednesday. “To us, this is a worst-case example of the risk that we have always struggled with on Activision: franchise durability.”

With Destiny gone, Activision Blizzard’s 2019 looks bare. Analysts have noted that its subsidiary Blizzard has no announced games, and that Activision has only its next Call of Duty game.

To make matters worse, the development studio for this year’s Call of Duty, Infinity Ward, is widely regarded as the weakest of the three that create games for the annual franchise. Infinity Ward’s last two Call of Duty titles were both significant sales disappointments.

Activision Blizzard is also facing a string of high-level management departures. Since December, it has lost its chief financial officer, two senior Blizzard executives, and a former Call of Duty studio head. (Short-seller Jim Chanos of Kynikos Associates has called mass executive departures the No. 1 sign of impending problems at a company.)

Despite the issues, Wall Street is still predicting that Activision Blizzard will generate 2% earnings per share growth in 2019, with sales flat versus last year’s. Its stock still trades for 18 times projected 2019 earnings, compared with 15 times for the S&P 500.

Likewise, Electronic Arts has profit risk this year, as its key nonsports title, Battlefield V, was slated to be a big source of highly profitable add-on micro transaction sales in 2019.

The problem is that Battlefield V doesn’t seem to be resonating with consumers. In November, the game was discounted by 50% just one week after its launch, signaling low sales. In addition, the title regularly doesn’t make the top 50 viewership rankings on Twitch, pointing to a lack of gamer engagement.

Electronic Arts shares currently trade for 18 times estimated 2019 earnings per share.

There is widespread sentiment among the gaming community that the traditional developers are failing to adapt to a Fortnite world, in which free-to-play games generate massive revenues through add-on content that gamers crave, such as funny costumes and dance emotes.

Research firm SuperData estimates that Fortnite has generated the most annual revenue of any game in history. The firm says that the game made $2.4 billion in sales for its publisher in 2018.

“I don’t mind buying great content, but Call of Duty is just bad versus Fortnite,” Han-Chung Lee, 39, a self-professed hard-core gamer and investment manager, told Barron’s in a phone interview Thursday. “There are no major games from EA and Activision that get me excited this year.”

Activision Blizzard declined to comment for this article. Electronic Arts also wouldn’t comment, citing its earnings quiet period. EA is slated to report its fiscal third-quarter financial results on Feb. 5, while Activision Blizzard will post its earnings on Feb 12. Don’t be surprised to see both provide disappointing guidance.

In a cover story last year, Barron’s predicted that streaming could ultimately remake the gaming world, boosting shares of EA and Activision in the process. That story could still play out, but it’s several years away and will require the technological advantages of 5G. Meanwhile, the traditional game publishers are struggling to make relevant games. And that’s bad news for their stocks.

Editor's Choice

News on Nintendo

As the major U.S. publishers suffer from an aging console cycle, weak pipelines, falling earnings estimates, and lack of enthusiasm from gamers, Nintendo (NTDOY) is bucking the negative trend.

A week ago, this column suggested that Apple (AAPL) should acquire or enter into a strategic partnership with Nintendo. But we also highlighted the Kyoto, Japan-based company’s improving fundamentals, citing accelerating Switch console and software sales.

The assessment looks better now. Nintendo’s president, Shuntaro Furukawa told a Japanese newspaper last week that its new Super Smash Bros. Ultimate had become the fastest-selling game in company history. A Nintendo spokesman confirmed the news to Barron’s. Nintendo stock closed the week up 12%.

Write to Tae Kim at tae.kim@barrons.com