Video Game Consoles Are Entering Their Sweet Spot: Here's How To Play It

In separate reports published Monday, Piper Jaffray analyst Michael J. Olson said that new generation consoles had been received well and appeared poised to drive sustainable software growth, especially for video game publishers.

Olson commented, "We expect that CY15 & CY16 will be the equivalent to CY07 & CY08 during the prior console cycle; both were years that experienced significant industry software growth, following several years of decline or limited growth in the space. This is positive for video game publishers."

Olson maintained an Overweight rating on Activision Blizzard, Inc. ATVI, while raising the price target from $30 to $33.

Activision Blizzard was poised to benefit from the "sweet spot" of videogame software. The company reported robust Q2 results and guided to FY15 revenues and EPS above the consensus. The guidance appeared to be "conservative," in view of the company's typical approach, Olson said.

The company's CY15 performance was expected to be driven by the new installments of "Call of Duty," "Skylanders," a reboot of "Guitar Hero" and a "Destiny" expansion. Activision Blizzard's strong pipeline was expected to drive 7 percent revenue growth in CY16.

Related Link: Activision Is Still Rewarding Investors, And More Call Of Duty Is Coming

Piper Jaffray maintained an Overweight rating on GameStop Corp. GME, while raising the price target from $52 to $56.

Olson said that GameStop was poised to benefit from "both continued next gen hardware sales and an uptick in software as gamers populate their libraries for Xbox One and/or PS4."

Citing the results of surveys of Next Gen Console owners, the Piper Jaffray report mentioned that about 78 percent of the surveyed people indicated a preference for physical discs versus digital. "In other words, GameStop may be a melting ice cube, but it doesn't appear that it will liquefy imminently."

Olson believes that GameStop's shares were quite inexpensive and did not reflect the company's growth prospects. The company's shares could appreciate in-line with the expected average EPS growth of 13 percent over the 2014 to 2016 period.