Digitization of distribution, in-game monetization and franchise management are three trends that have transformed the video game sector according to MoffettNathanson. The firm initiated coverage of the video game sector with call-outs on three leading stocks.
The Gaming Stock Analyst: MoffettNathanson analyst Clay Griffin initiated Activision Blizzard, Inc. ATVI with a Buy rating and a $124 price target.
The analyst initiated Take-Two Interactive Software Inc TTWO with a Buy rating and a $214 price target.
The analyst initiated Electronic Arts Inc. EA with a Neutral rating and a $151 price target.
All three of the top video gaming companies are seen growing earnings faster than the market by the analyst.
Activision Blizzard Takeaways: The scale of Activision Blizzard in mobile gaming and strong intellectual property is highlighted by the analyst, who also mentioned the Blizzard division.
“Activision’s Blizzard segment has an underappreciated slate of titles on the horizon, creating the industry’s best risk-adjusted growth story,” Griffin said.
“World of Warcraft” has seen strong momentum and is a highlight of the Blizzard segment. “Overwatch 2,” “Diablo Immortal” and “Diablo IV” are also highlighted as members of the strong Blizzard pipeline.
The franchises could each have more than $1 billion in net booking run-rates according to Griffin.
Activision’s “Call of Duty” continues to show strength and is seeing strong monetization from a free-to-play entry and a mobile game showing strength.
“'Call of Duty: Mobile' should continue to grow and the Tencent co-developed title is in the very early days of monetizing in China," Griffin said.
Take-Two Takeaways: Griffin calls out Take-Two as a video game company with an opportunity to scale organically.
“In our view, Take-Two arguably has the best-owned IP collection of franchises in the industry,” Griffin said.
The company’s "Grand Theft Auto" franchise continues to see strong growth and monetization. The "NBA 2K" franchise and "Red Dead Redemption" are also seeing recurrent consumer spending.
A catalyst for the company remains the release of “Grand Theft Auto VI" sometime in the future. Until then, Take-Two has a pipeline of games that is double what it was a few years ago according to Griffin.
“On pure upside potential, Take-Two may take top billing as it embarks on an ambitious organic investment strategy to dramatically expand its pipeline of production.”
Electronic Arts Takeaways: Electronic Arts get a Neutral rating and is seen not growing as fast as rivals ATVI and TTWO by the analyst.
There is pressure on the monetization methods of EA Sports titles with loot boxes and also concern by the analyst over capital allocation to the mobile games segment.
EA Sports games provide the company with a “consistent and durable cash flow profile.”
New titles including “Apex: Legends” show how Electronic Arts can increase its profile in the video game sector, according to the analyst, who sees the game as having an opportunity to expand into mobile.
“An upcoming return of the 'Battlefield' franchise could return that series to prominence in the shooter category and represent an upward inflection in earnings and cash flow for EA.”
(Photo: "Call of Duty" via Activision)
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