Is It Game Over For Media Publishers' 2-Year Run?

Since 2015, Activision Blizzard, Inc. ATVI, Take Two Interactive Software Inc TTWO and Electronic Arts Inc. EA have starkly outperformed the S&P 500.

While the index improved 13.4 percent, Activision saw a 214.6-percent boom, Take-Two spiked 102.3 percent and Electronic Arts popped 75.1 percent.

But — at least on the surface — it seems that the two-year run in video game stocks may be fading.

On Monday, Take-Two reported availability of 1.49 million shares prompted by selling shareholders, and Hilliard Lyons downgraded Activision to Underperform.

What We Know

Hilliard Lyons was generally underwhelmed by Activision's average "Call of Duty" sales, decline in King Digital monthly users and overall 2017 guidance. Non-GAAP revenue was posted at $6.3 billion compared to the firm’s anticipated $7.2 billion, and the company predicted EPS 16 percent short of estimates.

“While we feel this guidance is conservative, we also believe it reflects maturation of certain console franchises,” analyst Jeffrey Thomison wrote.

Thomison justified the firm’s downgrade by the stock’s present, all-time-high value and poor one-year potential, but he asserted hope in a two-year turnaround.

“Given that 2018 prospects seem considerably more attractive, we believe better investment opportunities could surface later this year,” the analyst wrote. “We suggest taking profits in existing positions and moving proceeds into securities with greater return potential.”

The Good News

Upon deeper inspection, then, it seems game publishers may survive to the next round.

Hilliard Lyons reported satisfaction with Activision’s strong fourth-quarter results, with non-GAAP revenues up 16 percent, operating income up 10 percent and EPS up 11 percent year-over-year.

Additionally, the company raised its annual dividend by 15 percent and announced plans to cut debt by $500 million and repurchase $1 billion in shares.

“We continue to believe the videogame industry is at a favorable point in its business cycle,” Thomison wrote. “We consider ATVI’s fundamentals to generally be strong with a growing portfolio of successful franchises and a continued focus on higher margin digital business.”