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Take-Two Interactive, Activision Blizzard and Electronic Arts: Why are their share prices dropping?

Next week, gaming giants Take-Two Interactive [TTWO], Activision Blizzard [ATVI] and Electronic Arts [EA] will be announcing their quarterly results, and their shareholders will be hoping that their earnings will get their shares back in the game.

Take-Two Interactive’s share price has dropped 18% from $207.79 at close on 31 December 2020 to sit at $173.42 at close on 30 July. Over the last 52 weeks, the share price is up 8.7%.

Meanwhile, Electronic Arts’ [EA] share price is down 3.4% from its peak of $148.97 in 2 February 2021 to $143.96 at close on 30 July. It fell to as low as $127.21 at the close on 8 March. The Electronic Arts share price has risen 3.5% in the last year.

Finally, Activision Blizzard’s [ATVI] share price has also been buffeted. It is down 19.5% from $103.81 at the close from its peak on 12 February 2021 to $83.62 at the close on 30 July. Its share price has risen 2.3% in the last 52 weeks.

 

The rise before the fall

All three stocks enjoyed success in 2020 and early 2021 as people turned to video games as one of their main sources of entertainment at home in the pandemic.

According to an NPD report, US video game spending raced to a record $56.9bn in the full year 2020 up 27% on 2019. In the second quarter of 2021, it came to $14bn, up 2% from the same period last year.

But in recent weeks, investors have become nervous that the end of lockdowns could make annual revenue comparisons more difficult. Meanwhile, the prospect of highly valued tech stocks in a potentially higher interest rate environment has cooled excitement in these shares.

In its fourth-quarter results released in May, Take-Two reported revenue growth of 10% to $839.4m, with net income up 78% to $218.8m. Net bookings rose 8% to $784.5m with good demand for Grand Theft Auto Online, NBA 2K21 and Red Dead Redemption 2.

$839.4million

Take-Two Interactive's Q4 revenue

  

It reports its first-quarter earnings on 2 August with, according to Zacks Equity Research, it is likely to post earnings per share of $0.92, down 65.7% compared to this time last year.

Revenues are tipped to come in at $678.5m, down 31.9% on the same period in 2020 with net bookings coming in at around $675m because of a lack of major game releases and updates.

However, analysts remain optimistic about long-term performance with Wedbush having an outperform rating and a target price of $212.

 

Surge in EA Bookings

In its full-year results, Electronic Arts saw net bookings surge 15% to $6.1bn helped by digital e-sports events such as FIFA 21.

It releases its first-quarter earnings on 4 August with Zacks tipping EPS to come in at $0.62 (down 54.4% year-on-year) and revenues of $1.27bn, down 8.8% year-on-year. The fall is likely already factored in current its share price.

$1.27billion

EA's predicted Q1 revenue

  

It received a recent rating upgrade to ‘outperform’ from BMO Capital Markets. The brokerage said in a note reported by CNBC that the strength of the video game market appeared to be being underestimated amid the economic reopening, and that some of EA’s games show upside potential in the upcoming year.

 

Can Activision Buck the Trend?

In its first-quarter results, Activision Blizzard posted net revenues of $2.28bn, up from $1.79bn in the same period in 2020, and EPS of $0.79, up from $0.65 last year. Net bookings, helped by demand for Call of Duty on mobile, came in at $2.07bn, up from $1.52bn.

It releases its second-quarter results on 3 August with Zacks expecting net sales of $1.89bn, down 9.08% from the year-ago period. EPS is tipped to be $0.76 per share, down 21.65%.

$2.28billion

Activision Blizzard's Q1 revenue

  

The Activision share price will also be under pressure by recent allegations about a hostile work environment. A lawsuit could impact both current and future projects.

For the full year, Zacks is more hopeful for Activision with earnings of $3.78 per share, up 8.93%, and revenues of $8.77billion, up 4.21%, expected. Wedbush has a buy rating on the stock and a target share price of $125.

 

What could boost gaming stocks’ share prices?

There are challenges ahead for the Take-Two, Activision Blizzard and Electronic Arts share prices.

The main being that users will have more alternative entertainment now that societies are re-opening, but it is more than likely that newbie video gamers will stick around.

Indeed, the global gaming market is set to grow at a CAGR of 9.24% to reach $287.1bn by 2026 according to Research and Markets.

The three gaming companies are also investing beyond video games to acquire studios, develop live e-sports and gaming events and create more mobile games which could rekindle interest for those coerced to socialise by peer to family pressures.

The sector is also likely to see more consolidation. Take-Two in June bought mobile games developer Nordeus for $378 million. Talks could trigger a run up in all three share prices (Take-Two Interactive, Activision Blizzard, and Electronic Arts).

Global X Video Games & Esports ETF [HERO] has allocated a 6.26% weighting to Electronic Arts, 6.37% to Activision Blizzard and 4.09% to Take-Two. The VanEck Vectors Video Gaming & Esports ETF [ESPO] has allocated 5.3% to Activision Blizzard, 4.62% to Electronic Arts and 4.35% to Take-Two.

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