Brean Lifts Targets On Activision Blizzard, Electronic Arts And Take-Two

In separate reports published Tuesday, Brean Capital analyst Todd Mitchell discussed why he is incrementally bullish on Electronic Arts Inc. EA, Activision Blizzard, Inc. ATVI and Take-Two Interactive Software, Inc. TTWO

Electronic Arts: ‘Cleanest' Path To Upside

According to Mitchell, Electronic Arts offers investors the "cleanest" path to upside after the company had arguably the "strongest" showing at E3.

Mitchell noted that EA is leading its peers on digital monetization on both consoles and mobile, thereby helping the company create a "more consistent" earnings profile and expanding margins.

However, since shares of EA outperformed its peers following EA and are now trading at a 25.0x multiple on fiscal 2016 non-GAAP earnings per share of $2.85, scenarios for further upside in fiscal 2017 are "getting stretched."

EA will report its first quarter results on July 30 after market close. The analyst is estimating a net revenue of $640 million and non-GAAP earnings per share of $0.01.

Looking past the first quarter, Mitchell stated that he is "comfortable" with his full year revenue and earnings per share estimates of $4.5 billion and $2.85, respectively. Both of these estimates are ahead of EA's own guidance as the analyst sees upside to the company's sales expectations of 9-10 million units of "Star Wars: Battlefront." At the same time, EA Sports is expected to "grow modestly" while "Need for Speed" and "Mirror's Edge" should "more or less" offset sales of "Dragon Age Inquisition" and "The Sims 4."

Shares remain Buy rated with a price target raised to $78 from a previous $75.

Activision: ‘Well Positioned' For Upside

According to Mitchell, Activision Blizzard had a "solid" E3 showing as all three of its largest franchises ("Call of Duty," "Destiny" and "Skylanders") look "materially better than last year." The analyst suggested that "Call of Duty" will be "strong enough" to lead the segment, but "'Destiny' is no longer looking like a sure bet" while "Skylanders" will be "challenged" by increased competition.

With that said, Mitchell stated that Activision's portfolio has a "slightly greater level of risk" versus its peers. However, the company's own guidance and the Street's consensus "continue to overly discount" Call of Duty and the company's F2P titles, which is the "likeliest source of positive catalysts" over the short term.

Activision will report its second quarter results on August 4 after market close. The analyst is estimating the company will report revenue of $660 million and non-GAAP earnings per share of $0.08.

Looking past the second quarter, Mitchell reduced his full year outlook due to lower expectations for "Destiny." The analyst is now projecting a full year revenue base of $4.6 billion (from a previous estimate of $4.81 billion) and non-GAAP earnings per share of $1.22 (down from a previous estimate of $1.23). Despite the downward revision, both estimates are above the company's own guidance and the analyst is expecting "Black Ops III" to show unit sales growth in the fourth quarter while a double-digit drop-off in "Skylanders" revenue will be offset by "Guitar Hero."

Shares remain Buy rated with a price target raised to $30 from a previous $28.

Take-Two: ‘Great Deal Of Opportunity' With Uncertainty

According to Mitchell, Take-Two's showing at E3 was "relatively weak" as the company had nothing new to show from Rockstar. However, the company continues to see "strong long-tail" sales of "Grand Theft Auto V" while GTA Online continues to show "robust metrics."

However, Mitchell stated that while GTA gives him "a fair degree of confidence" the company can meet its fiscal 2016 expectations, the analyst suggested there is the potential for further upside from the release of a "Destiny-like" title.

Mitchell also stated that shares of Take-Two are trading at a "significant" discount to its peers on an ex-cash basis.

Take-Two will report its first quarter results on August 10 after market close. The analyst is estimating the company will report revenue of $370 million and non-GAAP earnings per share of $0.42.

Looking past the first quarter, Mitchell stated that he sees upside to the company's "conservative" guidance and is expecting the company to report net revenue of $1.50 billion and non-GAAP earnings per share of $1.20. The analyst concluded that Take-Two's guidance doesn't reflect the "longevity" of GTA Online which he projected to contribute $185 million in digital revenue.

Shares remain Buy rated with a price target raised to $35 from a previous $32.