Pacific Crest Preview Video Games Earnings: Activision-Blizzard is 'Best Choice'

In a report rolled out Sunday, Pacific Crest analysts Evan Wilson and Tyler Parker previewed video game companies’ earnings and conclude that “optimism should continue in quite Q2.”

They note that a lack of releases over the quarter should lead to no big surprises. They believe the video game cycle is in its sweet spot, as physical software sales return to growth for the first time in years and digital momentum does not mitigate.

Activision Blizzard, Inc. ATVI is their top pick in the space and see an unfavorable risk/reward profile in King Digital Entertainment PLC KING, Take-Two Interactive Software, Inc. TTWO and Zynga Inc ZNGA.

Regarding Electronic Arts Inc. EA, they think momentum will continue into the release of Star Wars, “but see risk to hitting escalating expectations.”

Activision (Overweight, $30 price target)

The quarter was quiet for the company, with only a couple of relevant launches. However, the analysts “remain very bullish on the second half of this year with Call of Duty (CoD), Hearthstone, Heroes of the Storm and Diablo China,” and expect a beat and modest annual raise on the August 4 call.

Electronic Arts (Sector Weight)

EA has done very well and is heading into the release of the biggest game of the year: "Star Wars Battlefront." The analysts think “the whisper for Star Wars is approaching 20 million units, likely to a point where they will be hard to hit, given it's next-gen only and multi-player only. Nevertheless, we are in the part of the cycle where game stocks trade up into non-annualized releases on climbing expectations, and that should continue into Star Wars."

While they expect to see a beat and modest raise next Thursday, they think the valuation already reflects strong expectations, and that it should take some time for the stock to “digest its recent run.”

King Digital Entertainment (Sector Weight)

"Candy Crush" continues to be a hit. However, Pacific Crest believes success beyond the famed game is limited. The firm expects to see increased investments in other categories over the year, and anticipate a modest beat and in-line guidance on the August 11 report.

Take-Two Interactive Software (Sector Weight rating)

“With no new Rockstar game for at least 10 months, we would be waiting for more details and a better entry point ahead of Rockstar's next game,” said Wilson and Parker. Their biggest question remains “when will Rockstar's contract expire, as changing terms in the relationship between Rockstar and Take-Two present enough risk that TTWO continues to be a tactical trade around releases instead of a long-term investment.”

The analysts expect a modest beat and reiterated guidance on the August 10 earnings call.

Zynga (Sector Weight)

Zynga needs better games rather than cost cutting. The analysts note, “Cutting your lowest-performing developers doesn't make your best perform any better." In fact, the company’s success relied on a new big hit mobile game they don't see that in the horizon.

The analysts expect an in-line quarter and disappointing Q3 revenue guidance on August 6.