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Jefferies Upgrades EA, Take-Two As Console Cycle Approach 'Sweet Spot'

Jefferies Upgrades EA, Take-Two As Console Cycle Approach 'Sweet Spot'
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In separate reports published Wednesday, Jefferies analysts upgraded the ratings on Electronic Arts Inc. (NASDAQ: EA) and Take-Two Interactive Software, Inc. (NASDAQ: TTWO) from Hold to Buy, citing console sales and digital revenue tailwinds.

"Only two years into the new console cycle, we are already approaching a sweet spot where game development becomes less risky and more profitable on a per title basis."

There could be around 48-49 million next gen consoles by the end of the year. This would represent growth of about 69 percent Y/Y. The install base could be close to 100 million units by yearend 2017.

Both the companies appear well positioned to sell "substantially higher" units of games into the expanding customer base, with fixed development costs remaining roughly flat.

Analyst Brian Pitz raised the price target for Electronic Arts from $58 to $80, saying, "EA looks well positioned against two multi-year tailwinds: faster than expected console sales and the transition to higher-margin digital revenue."

Electronic Arts has significant console games, including FIFA, Madden, Battlefield and Star Wars. With this, the company has high exposure to the positive trend.

Pitz expects Electronic Arts to return 50 percent of its free cash flows to investors, starting with a share repurchase initiated of $1B spanning two years.

Analyst Brian Fitzgerald raised the price target for Take-Two from $29 to $35, saying, "Over the next few years, we think the company has the opportunity to sell more games into an ever increasing console install base…Combined with favorable digital revenue tailwinds, we expect continued margin expansion over time."

"For the past 5-6 years, TTWO has achieved the highest average metacritic scores in the industry. This is important because these high quality games tend to have highly engaged players. Over time, we see plenty of opportunity for TTWO to monetize this large audience via digital means," the report added.

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