How Google's Stadia Video Game Streamer Will Be 'Highly Disruptive'

For a while, Alphabet Inc GOOGL GOOG was content with its Google Maps Easter Egg games. Now, it’s ready for the big leagues.

Management announced Tuesday it will break into video games with a new streaming service, gaming hardware and content. Analysts are thrilled.

Bank of America Merrill Lynch analysts Justin Post and Benjamin Sherlund maintained a Buy rating and $1,350 price target on Alphabet. KeyBanc Capital Markets analysts Evan Wingren and Andy Hargreaves maintained an Overweight rating and $1,430 target, while Tigress Financial managing partner Ivan Feinseth recommends purchase.

The Theses

Google’s “Stadia” streaming service will live in the company cloud, open in Chrome or Chromecast, and require no console or download to play. While Google will market Stadia controllers, the system will be compatible with any device and third-party controller.

The service, slated for launch in 2019, is seen to be a boon for both publishers and Google.

“By offering a platform to gamers without the high barriers of entry of traditional gaming (expensive PCs or consoles), Google may expand the gaming market for AAA content (mobile market has over 2 billion players),” Post and Sherlund wrote in a note. “With YouTube being the ‘lobby’ for game access and Stadia offering the ability push to connect to games from YouTube, Stadia could be a tailwind to YouTube engagement and monetization.”

Feinseth agreed that YouTube integration yields significant growth and upside opportunities.

Analysts anticipate competition from Microsoft Corporation MSFT, which is already established in the content and console space, as well as Amazon.com, Inc. AMZN and Apple Inc. AAPL.

Roll-Out Hold-Ups

KeyBanc also suspects internet mechanics may prove inhibitive in the near term.

“Although we came away very impressed by the rollout, we believe internet speed could remain a material bottleneck for global adoption,” Wingren and Hargreaves wrote.

Bank of America Merrill Lynch noted that, if latency issues are overcome, Google stands to reap big rewards.

“If the service can launch with low latency as expected, we think Stadia will demonstrate the potential power of the Google cloud network in a 5G world (which could power the Internet of Things [IoT] and self-driving autos),” Post and Sherlund wrote. “Investors could, in turn, be more optimistic on capex investments.”

Secondary Effects

Stadia could remove barriers to the gaming industry as it cuts consumer costs, download time, and hardware or connectivity limitations.

“If Google can deliver on its promises, this technology has the potential to be highly disruptive; it is promising an ambitious service that can deliver 4K (and even 8K) gaming at scale globally that is ubiquitous and cross platform with low latency,” Wingren and Hargreaves wrote. “This is the holy grail for game makers.”

It is seen to expand the total addressable market for publishers like Activision Blizzard, Inc. ATVI, Electronic Arts Inc. EA and Take-Two Interactive Software, Inc. TTWO.

“By moving the compute power to the network, Google would help to accelerate the streaming transition, open up gaming to new players and allow for more advanced game play such as Battle Royal modes with 1,000s of players which was previously not possible,” Post and Sherlund wrote.

As Google builds its market, Bank of America Merrill Lynch expects publisher collaborations, content licensing deals or acquisitions of content studios.

Advanced Micro Devices, Inc. AMD may see more action, too. Google is using custom AMD chips for Stadia services but may see fit to expand the relationship.

"The new AMD/Alphabet partnership creates a significant opportunity for AMD and opens up the possibility that AMD chips could be used in other Alphabet/Google applications," Feinseth wrote.

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