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Cheat Codes: An Analyst's Guide To Q4 Video Game Earnings

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Cheat Codes: An Analyst's Guide To Q4 Video Game Earnings
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Video game producers are on deck to report earnings. Here's a preview of what KeyBanc Capital Markets is projecting ahead of the print.

The Analyst

KeyBanc Capital Markets' Evan Wingren:

Maintains an Overweight rating on Take-Two Interactive Software Inc (NASDAQ: TTWO)'s stock with an unchanged $144 price target.

  • Maintains an Overweight rating on Activision Blizzard, Inc. (NASDAQ: ATVI)'s stock with an unchanged $80 price target.
  • Maintains an Overweight rating on Electronic Arts Inc. (NASDAQ: EA)'s stock with an unchanged $134 price target.

Take-Two: 'Must Own' Stock

Take-Two Interactive is expected to earn $1.22 per share in its December-ending fiscal third quarter on revenue of $712 million when it reports Feb. 7, Wingren said in a note. The Street is modeling the company to earn 98 cents per share on revenue of $655 million. Consensus estimates remain "too low" heading into the print, which may be undervaluing the company — especially at a time when consumer spending on video games likely increased on a quarter-over-quarter basis, Wingren said. (See the analyst's track record here.)

Take-Two may have benefited from ongoing strength in "GTA Online," with "The Doomsday Heist" expansion adding "at least one-quarter of an entire new game" to "GTA Online" and resulting in record players, record digital revenue and the highest search volume for "GTA Online" in the past year, the analyst said. "NBA 2K" was the second-highest selling game in the U.S., and the company likely sold 3 to 4 million units in the fiscal third quarter, which would bring total sales of the game above 10 million units, according to KeyBanc. 

Take-Two's existing franchises are already "inflecting positively," and the company has two new anticipated launches in "Red Dead" and "Borderlands," the analyst said. Investors can expect a "transformational cycle" over the next two years, which makes the stock a "must-own" among investors, Wingren said. 

Related Link: Bernstein: Why Video Game Publishers Could Be 'The Perfect Media Companies'

Activision: A Pipeline As Healthy As Carrots 

Activision Blizzard is expected to report earnings of $1.06 per share in its fourth quarter on revenue of $2.8 billion when it reports Feb. 8, Wingren said. By comparison, the Street is modeling the video game company to earn just 91 cents per share on revenue of $2.5 billion. In fact, the Street's revenue estimate implies just $200 million of year-over-year revenue growth in the Activision segment, which appears to be "substantially low" and potentially creates a favorable catalyst for the stock, the analyst said. 

Looking forward to the full fiscal year, Activision could guide its EPS to $2.20, which is below the current consensus estimate, but the analyst is modeling the company to earn $2.85 per share in 2018 with room for upside. Wingren gave the following reasons why:

Better-than-expected performance in the "Call of Duty" microtransactions cycle.

Contributions from "Overwatch League."

Acceleration in digital downloads.

Activision Blizzard's pipeline is as "healthy" as carrots, but management may have to convince the Street that $3.25 per share or more in earnings power in 2019 is "feasible," which in turn would likely drive the stock higher, Wingren said. 

Electronic Arts: Expect Poor Quarter But Long-Term Picture Is Fine

Electronic Arts is expected to report earnings of $2.10 per share in its December-ending fiscal third quarter on revenue of $1.906 billion on Jan. 30, Wingren said. That's short of the consensus estimate of $2.20 per share and $2.017 billion, the analyst said. The top-and-bottom-line miss would be attributed to "company-specific execution" mixes, such as the fallout from the "Star Wars" monetization controversy.

Looking forward to the full fiscal year, it would be prudent for investors to view the company's slate of video game releases with a dose of "cautious optimism," Wingrent said. Digital download rates for the "Battlefield" and "Anthem" games should move as high as 50 percent and support Electronic Arts' gross margin expansion story, he said. 

Beyond the fiscal year, the company's absolute performance will continue to be "solid," and the longer-term picture could incrementally approve from eSports contributions and lower cost development from game engine consolidation, according to KeyBanc. 

Price Action

Shares of Take-Two hit a new all-time high of $122.21 on Monday. The stock was down 0.31 percent at $119 at the time of publication Monday afternoon. 

  • Shares of Activistion Blizzard were trading lower by 0.29 percent at $72.31.
  • Shares of Electronic Arts were trading higher by around 2.20 percent at $117.74..

Related Link:

Electronic Arts Upgraded After 'Star Wars' Backlash: Here's Why

Latest Ratings for ATVI

DateFirmActionFromTo
Oct 2018KeyBancMaintainsOverweightOverweight
Oct 2018BarclaysUpgradesEqual-WeightOverweight
Oct 2018BerenbergInitiates Coverage OnHold

View More Analyst Ratings for ATVI
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