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

Barclays Believes Video Games Entering New Paradigm, Fully De-Risked For The Year
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Electronic Arts Inc. (NASDAQ: EA) and Activision Blizzard, Inc. (NASDAQ: ATVI) 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.

"[W]hile it's hard to argue for multiple expansion from here, we do expect these stocks to consistently deliver high-teens to low 20 percent 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.

Related Link: Vetr Top Raters Downgrade EA

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 Electronic Arts and Activision, 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 opened Wednesday's trading at $66.60, while Activision Blizzard opened at $35.34.

Latest Ratings for ATVI

Feb 2018BarclaysMaintainsEqual-WeightEqual-Weight
Feb 2018Credit SuisseMaintainsOutperformOutperform
Feb 2018BairdMaintainsOutperformOutperform

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