Barclays Likes EA, Take-Two Among Gamer Stocks

Analysts at Barclays initiated coverage of a handful of video game makers with mostly bullish ratings.

Ryan Gee started coverage of Electronic Arts Inc. EA with an Overweight rating and $129 price target and Take Two Interactive Software Inc TTWO with an Overweight rating and $115 price target.

Electronic Arts

Electronic Arts is considered to be among the largest, most diverse, profitable and cash flow generative video game makers, Gee commented in his note. The company will continue to benefit from the ongoing secular shift from physical game purchases to digital.

In fact, Electronic Arts has succeeded in optimizing its business to capitalize on mobile, Live Services and full game downloads, the analyst said. Accordingly, the company's mix of digital as a percentage of revenue should grow from 61 percent in fiscal 2017 to around 80 percent by fiscal 2021. Gross margins are also expected to increase from the mid-70s today to the low-80s over the same time period.

Electronic Arts' business will also be supported by new monetization initiatives from various games that could generate an incremental $200 to $225 million in Live Services revenue over the next one to two years, Gee noted.

Take-Two Interactive

Take-Two Interactive is doing a "better job" in monetizing its popular video games relative to its peers, Gee said. Over time, the company's momentum and strong pipeline of games will enable the company to approach Electronic Arts' margins and more importantly, trade at a similar premium multiple.

In fact, the slate of upcoming and current video games, including "Red Dead Redemption 2" and a new 2K title will help Take-Two Interactive expand its margins at the highest rate among all of its peers over the next three to four years, the analyst argued.

"Read Dead Redemption 2" sees the kind of sales level similar to other AAA titles it could deliver an incremental $200 million in revenue and 75-cent per share above existing fiscal 2019 estimates.

Other Initiations

• Shares of Activision Blizzard, Inc. ATVI were initiated with an Equal-weight rating and $65 price target.
• Shares of NetEase Inc (ADR) NTES were initiated with an Equal-weight rating and $260 price target.

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