EA, Microsoft, Nvidia: Developers to chipmakers, which share price to back?

From game developers like EA [EA], to console-makers such as Microsoft [MSFT], to chipmakers like Nvidia [NVDA]; Opto round-ups the gaming stocks to watch.

The next few years are set to treat gaming sector stocks well, and with them, those that trade or invest in their share prices. From developers, to console manufacturers, to component makers, the entire supply chain boasts a healthy outlook. It’s a chain that covers a rich array of firms ranging from EA and Activision [ATVI], to Microsoft and Nvidia.

The industry is expected to grow by 12% annually over the next five years, led by demand in Asia-Pacific, Mordor Intelligence suggests. But as with any sector – and every game – there will be winners and losers.

Here, we look at what opportunities are available for share price traders and stock market investors.

Gaming developer growth

Electronic Arts [EA] has had a strong 2019, with its share price climbing from $77.22 at the start of the year to $102.37 as of 9 December – a 27.4% increase. Although short of the $140 highs experienced in 2018, the company has notched up positive revenue growth of 4.8% to $1.35bn in the second quarter and record digital net bookings helped by games such as ‘FIFA’. EA expects to expand its line-up of titles over the next couple of years and has recently sealed a licensing deal with Formula One.

However, EA reduced earnings per share may be restricting further share price growth. The second quarter’s figure of $0.78 is down not only from last year’s $0.83, but also under the $0.85 predicted by analysts. Vince Martin, writing in Investor Place, said the company needs a “catalyst” – a transformative game that will rekindle user excitement.

“Its core franchises like ‘Madden’ and ‘FIFA’ can theoretically last for decades to come. Not only that, but the products might well be almost defensive at this point, with less sensitivity to macroeconomic factors than other forms of entertainment,” he explains.

“Its core franchises like ‘Madden’ and ‘FIFA’ can theoretically last for decades to come. Not only that, but the products might well be almost defensive at this point, with less sensitivity to macroeconomic factors than other forms of entertainment” - analyst Vince Martin

However, as Martin suggests, EA bulls are not looking for the company to grind out 8% annual earnings or 10% to 12% share price appreciation. “Nor is it a particularly compelling investment case, even in a market trading at all-time highs,” Martin suggests, highlighting instead that the company needs a new source of revenue, probably from a new franchise.

Indeed, his comments also apply to rival Activision Blizzard [ATVI], which despite its popular ‘World of Warcraft’ series saw revenues drop 15% to $1.28bn in the three months to 30 September. Net bookings were down 27% year-on-year. Following the results, the stock dropped 5% by the following Tuesday. However, the stock has since recovered, climbing 1% since 7 November close.

“Activision has a worrisome reliance on old franchises. Games aren’t unique enough and some gamers feel they are being treated like cash cows,” Martin adds. Other analysts, however, point to the company’s leading position in the mobile and e-sports gaming space as an indicator of growth on the horizon.

“Titles from Activision’s mobile-focused King Digital segment including ‘Candy Crush Saga’ and ‘Candy Crush Soda Saga’ continue to be go-to choices for more casual gamers on smartphones and tablets,” says Keith Noonan in The Motley Fool. “The company still has plenty of opportunity to expand the reach of its big gaming franchises on mobile platforms and ramping up in-game advertising as a revenue stream. Activision can hit new all-time highs.”

“The company [Activision] still has plenty of opportunity to expand the reach of its big gaming franchises on mobile platforms and ramping up in-game advertising as a revenue stream. Activision can hit new all-time highs” - The Motley Fool's Keith Noonan

Martin also likes Ubisoft’s [UBI] prospects. “Franchises like ‘Rainbow Six’ and ‘Ghost Recon’ have growth potential in the eSports space and Ubisoft will have opportunities to create new properties to tap into the evolution of competitive gaming,” he says. “It needs to do a better job with innovation, but it should be able to turn the ship around.”

Ubisoft’s share price has been on a downward trend in 2019, falling from €70 euros to €57 as of 10 December. The group, best known for the ‘Assassin’s Creed’ franchise, recently downgraded forecasts for 2020 with operating income now between €20 and €50m, sending the share price down 16% on the day the news was announced. The company admitted that poor gamer reception for its ‘Ghost Recon Breakpoint’ game is behind these revisions.

Take-Two Interactive Software [TTWO] has seen its share price rise from $87 at the start of the year to $121. Its second-quarter figures, helped by games such as ‘NBA’ and ‘Grand Theft Auto’, were impressive with net revenues growing 74% to $857.8mn and net bookings rising 63% to $950.5mn.

How are the console kings performing?

Nintendo [7974] reported a 53% lift in profits to JPY94bn yen in the six months to 30 September on 31 October, boosted by strong sales of its Switch and Switch Lite devices. It expects operating profit to come in at JPY260bn yen for the year to March 2020, and for revenue to come in at JPY1.25tn. Up to 10 December and following the news, the company’s stock is up 20%.

Competitor Sony [6758], meanwhile, appears to be struggling. Its game and network services division has struggled, recording a 17% revenue drop in its second-quarter as a result of falling console sales. However, analysts currently expect its share price to rise, having set an average price target of JPY8,085.50  – a potential increase of 12% on 10 December’s price of JPY7,245.

Microsoft [MSFT], meanwhile, beat expectations on both top and bottom lines with its most recent set of results despite the fact its personal computing unit – the company’s core – fell short of analysts’ estimates. Its next generation Xbox coming out next year should, however, give it a lift.

Cashing in on chips

Chipmakers have struggled to brace against the impact of the US-China trade war. One that has managed to withstand these headwinds is Nvidia [NVDA], which has seen its share price rise from $130.64 in January to $215.50 as of 10 December.

However, its recent results point to a potential downturn. In November, the company announced a 27% drop in gross profits, which came in at $899m. Revenue also declined from $3.18bn to $4.01bn.

Morgan Stanley analysts, however, believe it is well-positioned for growth in 2020, upgrading its stance on Nvidia to overweight with a share price target of $259. Aside from gaming, Nvidia is also likely to benefit from growing demand for data centres, 5G and autonomous vehicles.