A Tale of 3 Gaming Stocks — 2 to Buy, and 1 to Avoid

We’ve talked a lot here about how the ongoing corona crisis has pushed large parts of the white-collar work sector online. But office work is not the only aspect of life that has been ‘digitized’ by the pandemic; online gaming has also gotten a boost. Social lockdowns have kept people in their homes, and even when they could leave, public entertainment and leisure activities have been severely curtailed. Computer gaming, however, whether solo or networked, is one form of entertainment that is fully compatible with social distancing.

By now, we’re all heartily tired of those social lockdown policies, but that doesn’t necessarily mean that new gaming habits are going to change. In a note for investment firm Raymond James, Andrew Marok writes, “Major publishers are likely to benefit in an outsized fashion from the shifts in the industry landscape… we see continued growth driven by both expansion of the gaming audience, and gaming taking increased time share among forms of entertainment.”

Specifically, Marok notes two important points that he sees as permanent changes in the gaming ecosphere: first, that "pandemic-accelerated shifts in time spent [are] likely to persist" and second, that "Cloud gaming [is] likely a longer-term benefit to gaming access."

Marok goes on to initiate coverage on three major gaming companies, all large-cap publishers in the field. We’ve looked into the TipRanks database to get the latest information on Marok’s calls; it’s interesting to note that, despite the companies’ broad similarities, the analyst doesn’t give them all a Buy rating.

Activision Blizzard (ATVI)

Marok’s first call, Activision Blizzard, is the largest of these three gaming companies, with a $69.7 billion market cap. Activision has a long history in the computer gaming industry, dating back to the early days of cartridge-loaded game consoles. The company is based in Santa Monica, California, and has a wide portfolio of popular games. Activision’s holdings include the hit RPG franchises ‘Call of Duty’ and ‘World of Warcraft,’ as well as lighter offering like ‘Guitar Hero’ and ‘Candy Crush.’

Activision has seen a hefty gain in recent months, with the shares rising 52% since last January. The share gains come along with a strong year-over-year gain in monthly active users; the 3Q20 numbers, the recent reported, showed an MAU of 390 million, up 23% from 3Q19.

Growth in users translates to growth in revenues, and Activision Blizzard has not disappointed on that front. The Q3 top line was $1.96 billion, up 54% year-over-year, and beating the forecast by 14%. The 78 cents EPS was up 5% sequentially, and an impressive 200% yoy. The company will release 4Q20 results on February 4.

Two metrics show the strength of Activision Blizzard’s game portfolio and industry position. In early December, the company announced that the launch of ‘Black Ops Cold War,’ the latest in the ‘Call of Duty’ franchise, resulted in $3 billion worth of net bookings over the past year. And also in early December, ‘Shadowlands,’ the eighth expansion of ‘World of Warcraft,’ sold 3.7 million units in its first day, making it the best-selling PC game of all time.

Andrew Marok, in his initiation note on Activision Blizzard, paints an upbeat view of the company’s prospects.

“Activision Blizzard is uniquely positioned within the interactive entertainment industry, featuring a portfolio of leading franchises across all major platforms. While 2020's growth sets a high bar, we expect the strength in the company's core franchises, attractive opportunities in launching and scaling console/PC franchises on mobile, and announced projects in development to drive further gains as video gaming takes a larger role in the broader entertainment space post-pandemic,” the analyst opined.

Marok rates the stock Outperform (i.e., Buy), and his $109 price target implies an upside of ~21% for the next 12 months. (To watch Marok’s track record, click here)

There is broad agreement on Wall Street about Activision Blizzard, as shown by the unanimous Strong Buy consensus rating – based on new fewer than 16 Buy-side reviews. The stock is selling for $90.27 and has an average price target of $102.94, suggesting a 14% upside on the one-year horizon. (See ATVI stock analysis on TipRanks)

Electronic Arts (EA)

Next on the list is Electronic Arts, a $41.4 billion gaming company from Silicon Valley. Like Activision Blizzard above, Electronic Arts has the benefit of holdings a large portfolio of established, popular games. The company’s franchise gaming titles include ‘Medal of Honor,’ ‘Star Wars,’ and the ‘The Sims.’ In addition, EA owns and publishes a series of sports games, including ‘Madden NFL,’ ‘NBA Live,’ and ‘FIFA.’

EA shares are up 28% over the past 12 months, a strong gain powered by the general strength of the computer gaming industry in the current environment. Revenues and earnings, however, have not followed suit with the share appreciation, despite beating analyst expectation. In the last reported quarter, the company’s fiscal second of 2021, EA reported revenues of $1.15 billion, down 14% year-over-year, and earnings of 63 cents per share, down 78% yoy. Analyst forecasts, however, had been for revenues of $955 million and EPS of 2 cents; EA beat that by a wide margin.

In December, EA announced that two of its major sports titles, ‘Madden NFL’ and ‘FIFA’ have been released for the latest generation of the PlayStation 5 and Xbox Series X|S. Bringing these games to the newest consoles offers players faster load times and more realistic animation, for a more authentic game experience.

The solid foundation provided by EA’s sports offerings impressed Marok, who wrote of the company, “EA’s combination of a dominant sports lineup with a diverse portfolio of owned-IP franchises give the company a highly competitive content lineup… EA’s sports titles are must-haves for any platform operator and provide natural tie-ins with professional sports leagues for esports competitions. In addition, as the worldwide gaming audience grows, gamers in emerging markets are likely to seek out EA content, especially titles like FIFA.”

In line with these comments, Marok rates the stock as Outperform (i.e. Buy) with a $164 price target. At current pricing levels, his target indicates room for ~14% growth in 2021. (To watch Marok’s track record, click here)

There are 17 reviews on file for Electronic Arts, breaking down to 7 Buys and 10 Holds and giving the stock a Moderate Buy analyst consensus rating. EA’s recent share gains have pushed the stock price up to $143.51, right under the average target of $147.85 and leaving room for just a 3% upside potential. (See EA stock analysis on TipRanks)

Take-Two Interactive (TTWO)

The third stock on this list, Take-Two, is the third largest company in the gaming space, with a market cap valued at $23 billion. Take-Two operates as a holding company, with two main subsidiaries, Rockstar Games and 2K, developing and published titles. The combined portfolio includes several major franchises: ‘Civilization’ and ‘Borderlands,’ ‘NBA 2K’ on the sports front, and the long-running ‘Grand Theft Auto.’

Take-Two is working hard at penetrating a crowded gaming sector, and is aided by the growth in the online gaming audience and the overall high quality of its offerings. While entering a space dominated by Activision Blizzard and Electronic Arts is a difficult enterprise, a measure of success can be seen in Take-Two’s recent financial reports. For 3Q20, the company reported revenue of $841 million and earnings of 86 cents per share. The top line was down 2% from the year ago quarter, while the EPS was up 36%. On solidly positive notes, the company’s net bookings in the quarter grew to $957 million, a record level.

TTWO shares have shown the steepest gains of the three gaming companies on this list, and are up an impressive 60%.

Analyst Marok takes a nuanced stance of Take-Two, writing, “Take-Two is in the middle innings of its evolution from “the Grand Theft Auto company” to a largescale publisher with a broad and diverse franchise portfolio. The company has supplemented its strong Rockstar results with the rise of NB 2K and an underappreciated collection of 2K franchises… Take-Two is well-positioned to benefit from macro trends in the gaming industry, and the company’s robust pipeline gives it enough options to spur the next generation of hits. While we see a lot to like in the company and are optimistic in its go-forward path, we believe that TTWO is appropriately valued at current levels…”

Translating that stance to a rating, Marok initiated his coverage of TTWO with a Hold; he does not a set a price target at this time. (To watch Marok’s track record, click here)

Overall, Wall Street is a little more bullish than Marok on Take-Two – but not by much. There are 19 reviews of this stock on record, and they include 12 Buys and 7 Holds. The average price target, however, is $204.12, suggesting a mere 2% growth in the year ahead from the current trading price of $200. (See TTWO stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.