Market Overview

Diablo III and Max Payne 3 – Gamers and Investors Rejoice


A week ago, it was reported that the sluggish American videogame industry had reached yet another unwelcome milestone, as April sales were down 26 percent from the same month last year.  Declining revenues are nothing new for game developers, as industry-wide sales have shrank by an average of 8 percent each year since a peak of $21 billion was reached in 2008.  If the first four months of 2012 are any indication, sales will shrivel to $12 billion by Christmas.  This would be around the same level as six years ago, when the Xbox 360 and PS3 were in their infancy.

This past Tuesday, however, marked the release date of two of the most anticipated games of 2012: Diablo III and Max Payne 3.  The former lets players defend the world from a hoard of hellish creatures, while the latter gives gamers a shot at using that oh-so-sweet bullet time to save a damsel in distress from Brazilian gang lords.  Yes, both Diablo and Max Payne share an affinity for violence, but there’s also another thing tying these two games together – dollar signs.  Both games are expected to be boons to their respective developers.         

It has been nine years since Rockstar Games, a subsidiary of Take-Two Interactive (NASDAQ: TTWO), released the last Max Payne.  From a gaming standpoint, TTWO has burgeoned from a blossoming youngster to a full-fledged behemoth, acquiring a bevy of developers to diversify its product line.  One thing that has not expanded, however, has been the company’s yearly revenues, as they have consistently hovered around the $1 billion mark.  Additionally, TTWO has had troubles translating its sales from the top-line to the bottom-line, as it has been plagued with negative earnings in three of the past five years. 

On the bright side, the company did report a positive EPS of $1.02 last year, beating the Street’s estimates.  Since the start of 2012, though, shares of TTWO have lost 7 percent, but the stock is currently trading at a forward P/E of 4.6X, which would signal a 60 percent discount compared to competitors like Electronic Arts (NASDAQ: EA) and Activision Blizzard (NASDAQ: ATVI). 

Speaking of the company that brought us Diablo and Diablo II, Activision Blizzard’s latest installment into the fantasy RPG realm is one of the most hyped games of all time, as it just recently broke Amazon’s (NASDAQ: AMZN) all-time preorder record.  It is hoped that Diablo III sells as well as the developer’s own Call of Duty: Modern Warfare 3, which grossed $775 million in the game’s first week on the shelves.  On the whole, AVTI has been one of the best stocks in the videogame industry, as it has returned almost 12 percent over the last year. 

Moreover, the company has grown its revenues by an average of 16.3 percent since the recession; while the industry has remained relatively flat, as mentioned above.  Additionally, it seems that shares of AVTI may be undervalued, with an earnings multiple of 14.9X that is below the industry average (21.1X), and its own 10-year historical average (44.4X).  Additionally, the company is superb at maintaining a mountain of cash, which is crucial for the ever-changing world of videogame development.  AVTI regularly maintains free cash flows north of $1 billion, which make up nearly a quarter of the company’s revenues.

Over the next few weeks, it will be important for investors to follow the sales trajectories of Diablo III and Max Payne 3.  Check back at Benzinga for an update on game sales, TTWO and ATVI, and the state of the videogame industry.


Follow me on Twitter at @mjakemann

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