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Industry Spotlight

Can Activision, EA and Nintendo share prices provide hope amid market sell-off?

With millions of people self-isolating could the share prices of gaming giants Activision Blizzard, EA, Nintendo and Take-Two Interactive thrive, and provide hope for stricken stock market traders?

As control measures in response to Covid-19 become stricter, gaming giants such as Activision Blizzard [ATVI], EA [EA]Nintendo [7974.T] and Take-Two Interactive Software [TTWO] will hope to provide some form of solace for individuals self-isolating during these testing times. But how will this change in consumer behaviour affect these companies’ share prices?

Gaming platform Steam has set new records for concurrent users, with over 20 million reported on multiple occasions recently, according to techradar. In China, average weekly game downloads soared 80% in the first three weeks of February during its worst period of isolation, Reuters notes.

80%

China's increase of average weekly game downloads in first 3 weeks of February

 

Meanwhile, James Mitchell, chief strategy officer and senior executive vice president of Tencent — the world’s largest gaming company — stated in the company’s recent earnings announcement that even after the pandemic fades, structural changes to consumer and enterprise behaviour “will be longer lasting”. So what’s next for the world’s high-profile publishers as Activision, EA, Nintendo and Take-Two jostle for position?

 

What does this mean for Activision, EA, Nintendo and Take-Two’s share prices?

Despite this perceived wisdom and in line with markets generally the share price of a number of major developers has so far seemingly suffered. The share price for developer EA have dropped from an early-March high of $111.83 to $86.94 as of close 20 March. Take-Two, which offers products under brands such as Rockstar Games, hit a peak of $130 in late-January to then slide to $100 currently.

Activision, which develops and distributes content and services on video game consoles — after reaching its highest point in more than 14 months of $64.37 in mid-February — has dropped $52.05 on 20 March. Meanwhile, tech giant Nintendo saw its shares fall from JPY42, 740 at the start of the year to JPY37, 810 (through 23 March).

 

 

 

While these drops are significant however the shares have still managed to largely outperform the NASDAQ — currently 29% off the all-time high achieved in mid-February.

 

Short-term beneficiaries

According to Thornton in his note to clients, video game stocks could benefit from the confinement effect of the virus, at least in the short term.

Piper Sandler analyst Michael Olson is also convinced about the sector. “While concerns around the coronavirus have battered global financial markets, the video game publisher group has exhibited resiliency," he said in a note to clients, according to Investor’s Business Daily. He added Activision Blizzard to the list of gaming stocks likely to benefit from isolation.

“While concerns around the coronavirus have battered global financial markets, the video game publisher group has exhibited resiliency” - Piper Sandler analyst Michael Olson

Meanwhile, Nintendo is evolving its business model to rely not just on console revenues but cash from games publishing, Seeking Alpha explains. Currently it is the publisher of 19 of the top 25 best-selling games and has strong IP rights for the industry including Pokémon.

It is also expanding into China, the globe’s second largest gaming market, through a partnership with Tencent to distribute its Nintendo Switch console.

Overall, it is clear that gaming stocks will get a boost as indoors becomes the new outdoors during the pandemic and dedicated gamers and new customers count away the hours. This could lead to increased demand and loyalty when life returns to normal. New console launches — from Sony in the form of the PlayStation 5 and Microsoft’s Xbox Series X — later this year will also likely spur more user interest.

 

What analysts think

Analysts remain bullish about the prospects of these gaming stocks. In a note to clients recently, Matthew Thornton, analyst at SunTrust Robinson Humphrey, said both EA and Take-Two were “good houses in a bad coronavirus neighbourhood”, according to Investor’s Business Daily. The stocks, the publication notes, will be boosted by key game franchises such as ‘Madden NFL’ and ‘Grand Theft Auto’.

On 5 March, Zacks Equity Research stated EA has an expected earnings growth rate for the next quarter of over 100% against the toys, games and hobbies industry’s projected earnings decline of 65.7%.

 

 

 

Nicholas Rossolillo, writing in the Motley Fool, says he likes EA shares because they trade for just 15 times one-year trailing free cash flow and 9.3 times one-year trailing earnings per share.

“With management having forecast a 7% increase in revenue and the earnings per share forecast getting an additional bump from ongoing share repurchases, the stock looks like a pretty good value,” he said.

Thornton has a year-end price target of $118 on EA. Meanwhile, put the year-end target price for Take-Two of $129.

Zacks also considers Activision strong. In February, it the analysts stated that Activision’s ‘Call of Duty’ series has been a global hit and stating that it expected earnings growth rate for the current year of 10.2%. Among 23 of 34 analysts polled by CNN business, the stock is a buy, with 31 analysts offering a media 12-month price forecast of $70.

Analysts also like the Activision’s exposure to the growing esports sector through products such as ‘Call of Duty’ League. This helps boost revenues through advertising, sponsorships, sales of media rights, merchandise and tickets. Indeed in January sealed a deal with Alphabet making YouTube the exclusive streaming provider of its esports league.

 

 

 

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