InvestorPlace feature writer James Brumley wrote a great piece Nov. 21 about Activision Blizzard, Inc. (NASDAQ:ATVI) and how ATVI could learn from the Electronic Arts Inc. (NASDAQ:EA) debacle that company is facing from nickel-and-diming video game players with in-game purchases for its Star Wars Battlefront II title.
Source: Gamevil Inc. via Flickr
Brumley reminded investors that Activision generates more than half its annual revenue from in-game purchases, and ATVI stock could face the same hit to its market cap as EA stock’s seen this November, down 12% for the month through Nov. 29.
This situation reminds me of Candy Crush Saga, the mobile game that’s now owned by Activision.
In 2016, I recommended “10 Stocks That Will Hold Back Your Retirement.” One of them was Zynga Inc (NASDAQ:ZNGA), which I suggested was losing monthly active users as a result of getting the brushoff from Facebook, Inc. (NASDAQ:FB).
It’s made a little headway since then, but I’m still not sure it’s a stock you want in your portfolio.
Anyway, in that article, I mentioned my wife’s experience with the mobile game.
“A couple of years ago, my wife was addicted to playing King Digital’s Candy Crush Saga on her iPhone. It seemed everywhere we went she was playing that darn game,” I wrote July 12, 2016. “And now she doesn’t. Her interest simply withered and died. That’s the risk of mobile games.”
What I didn’t say in that article was that a big reason for her interest fading was the money required to keep playing the game. She refused to make in-game purchases — Candy Crush Saga players spent more than $1.3 billion in 2014 — making the game pointless after a while.
The Backlash Will Spread
The same thing is now happening with games like Star Wars Battlefront II, and that will hurt the ATVI stock price.
“Battlefront II is the pointy tip of the iceberg.… The biggest recent controversy has centered around EA’s Star Wars Battlefront II, where early evidence suggests player anger over a mishandled loot box economy may in fact be impacting initial sales,” Cowen’s Doug Creutz wrote in a Nov. 27 note to clients.
“We think the time has come for the industry to collectively establish a set of standards for MTX implementation, both to repair damaged player perceptions and avoid the threat of regulation.”
Video games are too expensive to expect active players to put up with this kind of treatment for very long. Activision should be careful, or it just might kill the golden goose and ATVI stock.
What’s this got to do with Wynn Resorts, Limited (NASDAQ:WYNN)? More than you think.
There are games of chance (slot machines), games of skill (poker), and a combination of both (blackjack). Some of the games available at casinos offer better odds of winning than others; ultimately, however, the odds are stacked in the casino’s favor.
Steve Wynn knows this better than most. His casinos profit by slowly taking your money, while doing their best also to entertain you.
How is Activision any different?
You can pay the standard $60 for the game and then buy in-game purchases to equip yourself better to move farther into the game’s content, but it’s going to cost you.
The big difference is when you go into a casino, you don’t expect to come out with more money than you had going in. If you do, you’re either a professional or problem gambler.
Activision, Electronic Arts and all the other video game makers are trying to pull a Wynn by getting players accustomed to paying more for their video game experience.
However, casinos are highly regulated; video games are not.
Should regulators rain on the parade of ATVI stock by getting involved in the video game industry, it’s safe to say that Activision’s earnings will drop dramatically while its P/E ratio goes through the roof.
Bottom Line on ATVI Stock and WYNN Stock
Both stocks currently trade at 42 times earnings.
Frankly, I’d rather dance with the devil I know, than the devil I don’t.
For my money, this makes WYNN stock the better buy.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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