Barclays Believes Video Games Entering New Paradigm, Fully De-Risked For The Year

Electronic Arts Inc.

and Activision Blizzard, Inc.

will be able to sustain at least high-teens earnings multiples throughout cycles due to their diversified and less cyclical businesses, according to a note from Christopher Merwin of Barclays. "..while it's hard to argue for multiple expansion from here, we do expect these stocks to consistently deliver high-teens to low 20% annual returns (at least in line with EPS growth) over the next several years - clear outperformers, we think, relative to our group and the market," Merwin wrote in a note. Merwin, who believes video games are entering a "new paradigm," noted that Activision's disappointing 2016 outlook has fully de-risked the year ahead of positive catalysts like the release of Overwatch and perhaps incremental King advertising revenue. For Electronic Arts, the analyst assumes the FY17 EPS outlook could in-line to slightly-below consensus. If any potential sell-off happens in the stock on this ground, Merwin believes it could provide a compelling buying opportunity ahead of a very strong 2H17 slate, including Battlefield 5 and Titanfall 2. The analyst noted the challenging fourth quarter for EA and ATVI, have fully de-risked the estimates for the first quarter and year. As such, Merwin expects positive revisions will be back, restoring investor confidence in these names as increasingly predictable, secular growth plays. "Despite increasing chatter about a near-term slowdown in software demand, we think the video game stocks are not only less exposed to console revenue, but the hardware cycle is likely to shorten to 3-4 years, which should mitigate a late-cycle lull in demand," Merwin added. Shares of Electronic Arts closed Monday's trading at $66.19, while Electronic Arts closed at $35.21.