If there is one industry that almost seems invincible to economic downturns it’s the gaming industry, and with good reason. The increase in developer skills and technology, combined with an ever-increasing number of gamers being added to the already significant pool, is keeping the industry leaders pushing the envelope ever farther to come up with the kind of content that keeps even the hardest-core gamer coming back for more.
In a new Stifel research report, the analysts focus on some of the top companies in the industry, and they raises price targets on three Buy-rated stocks that could have some big news at next week’s Electronics Entertainment Expo (E3).
The report noted this:
Similar to recent years, we view E3 as a potential catalyst for the industry, which continues to exhibit strong fundamental characteristics. Considering the historical trading patterns, along with an even more compelling 2018 calendar year line-up for the publicly-traded third party publishers, we remain overweight the group, and are increasing our target prices.
Activision Blizzard
This company remains a top pick on Wall Street. Activision Blizzard Inc. (NASDAQ: ATVI) develops and publishes online, personal computer (PC), video game console, handheld, mobile and tablet games worldwide. It develops and publishes interactive entertainment software products through retail channels or digital downloads and downloadable content to a range of gamers.
Some analysts feel the company could earn up to $3 per share by 2018 if it can optimize the King Digital advertising opportunities and unlock synergies. Advertising in the company’s Candy Crush franchise has posted a solid start, and the Stifel team noted:
We’re anticipating improved results for Activision Blizzard’s console publishing segment, and forecast second half 2017 non-GAAP revenue growth of 20%+. The key drivers here include the planned launches of 1) Call of Duty: WWII (November 3rd release date) where management is already guiding to sales growth for the franchise in the fourth quarter (Stifel estimates 19 million full game unit sales); and 2) Destiny 2 (September 8th; Stifel 2017 estimates 9.2 million full game unit sales), both of which should be prominently featured on the E3 show floor.
Shareholders receive a 0.50% dividend. The Stifel price target jumped to $66 from $60, and the Wall Street consensus target is $59.65. The stock closed Thursday at $60.55.
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Electronic Arts
This leading video game developer should benefit from not only the continuing rise in new console sales, but also the rising trend of mobile gaming. Electronic Arts Inc. (NASDAQ: EA) produces top-selling games and related content and services under the EA brand in various categories, including action-adventure, role-playing, racing and first-person shooter games.
The company, which is very well known for its EA sports games like Madden Football, has made the move into mobile play by adapting many of the top franchise titles, which have been popular for years, into the mobile arena.
The company posted solid numbers in May. Revenues were in line but earnings beat expectations, and many felt that underscores the importance of in-game spending and its impact on profitability. For fiscal 2017, full game downloads accounted for 33% of unit sales, up from 24% last year.
The Stifel report said:
Full game unit sales will likely be lower year over year given a difficult comparisons with FIFA 17 and Battlefield 1(Fiscal 2018 Publishing & other non-GAAP revenue guidance was down 10% y/y). But we thought the company was particularly bullish (with fiscal year fourth quarter 2017 earnings) on the prospects for Madden NFL 18 (moving to Frostbite engine) and Star Wars Battlefront II (3 times more content versus the original plus a less competitive slate) where management expects shipments to match Star Wars Battlefront (14 million units in fiscal 2016).
Stifel raised its price target to $124 from $118, and the consensus target is $112.35. Shares closed above that level Thursday at $114.29.
Take-Two Interactive Software
This top video game producer has cashed in with some super-hot titles. Take-Two Interactive Software (NASDAQ: TTWO) offers its products under labels such as Rockstar Games and 2K. It develops and publishes action/adventure products under the Grand Theft Auto brand, as well as other franchises, including Civilization, Borderlands, Bioshock and Red Dead under the Rockstar Games label. The Grand Theft Auto franchise has been one of the best-selling video games ever released.
The company also posted a fourth-quarter beat driven by strong contribution from Grand Theft Auto and continued growth in digital spend. Fiscal year 2018 guidance was lower than expected on the Red Dead release delay. However many on Wall Street feel that fiscal year 2019 could be a record year, better than the last Grand Theft Auto release.
The analysts noted:
The company also indicated that it will NOT be showing any new product at E3 this year, and despite speculation, we doubt Red Dead 2 will be featured as part of Sony’s media presentation.
Stifel raised its price target to $87 from $81. The consensus price objective is $82.47, and shares closed Thursday at $79.32.
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Any way you look at it, the stock prices of all these top gaming stocks have soared over the past year. While E3 could generate even more interest, and perhaps boost prices, it may make sense to buy small positions now, and see if the summer doesn’t bring some back-up in the shares, allowing for even better entry points.
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