The coronavirus lockdown has boosted game maker share prices as people try to keep themselves entertained indoors. What new levels can they reach going forward?
The share price for gaming firm Electronic Arts [EA] is up from $100 at the end of March to $113.27 on 1 May, while its rival Activision Blizzard [ATVI] has seen its share price up from $59.48 to $64.72 over the same period.
Both are among the lucky few companies that are seeing a share price boost as a result of lockdowns being instituted across the world. Stuck at home, people are turning to computer and video games, either on consoles or streamed via their devices, to help keep their spirits up.
According to the NPD Group, US gaming industry sales rose 35% in March to $1.6bn — the highest reported spend for the month in 12 years.
"We see video games as the most compelling, affordable, escapist entertainment option for those stranded at home long term i.e. weeks and months, not days," said CFRA analyst John Freeman.
“We see video games as the most compelling, affordable, escapist entertainment option for those stranded at home long term i.e. weeks and months, not days” - CFRA analyst John Freeman
Will EA beat pessimistic estimates?
When both firms reveal their quarterly results on 5 May, it will be seen how much the recent spike in activity has boosted their financials, and whether it’s fuelled their chances of a post-earnings share price bounce.
According to Zacks, Fifa and Madden maker EA is expected to post fourth-quarterly to the end of March earnings of $0.98 per share, down 30.5% year-on-year. Revenues, affected by a lack of major game releases over the period, are tipped come in at $1.17bn, down 14% from the same time last year.
But it’s not beyond the realms of possibility that EA will exceed these expectations — and an earnings surprise could give its share price a further lift. The game maker posted such a surprise in the Q3, reporting $2.79 per share compared with a Zacks estimate of $2.52. In Q2, it announced $0.96 per share, up from the forecasted $0.85.
Its future revenue prospects also look bright, given the pandemic’s resulting boom and an expectation that even when lockdowns are lifted that new customers will have caught the gaming bug.
According to MarketScreener, analysts’ consensus for EA is outperform with a share price target of $120. This would be a 6% increase on 1 May's closing price. Luke Lango, writing in InvestorPlace, believes the share price could rally to $125 as video-game sales continue their robust momentum for the rest of the year.
“Thanks to its strong content portfolio, EA will continue to hold sizable market share in the non-cyclical-growth video-game market for the foreseeable future,” he says.
“Esports, which is still in the first inning of explosive growth, can boost EA’s results meaningfully. Another positive catalyst will be technological improvements such as 5G, which will help improve the quality of interactive video games.”
Lango expects EA to see its top-line numbers jumping 7% or more annually through to 2025, with earnings per share reaching $8 by that date.
“Esports, which is still in the first inning of explosive growth, can boost EA’s results meaningfully. Another positive catalyst will be technological improvements such as 5G, which will help improve the quality of interactive video games” - Luke Lango
A share price climb of 10% for Activision?
Activision Blizzard ‘s first-quarter revenues will have been boosted by Call of Duty: Modern Warfare, America’s top-selling game so far in 2020.
The company expects to deliver $6.5 billion in net revenue in 2020, the same as it did in 2019, with earnings of $1.85 per share ($0.11 below 2019’s EPS of $1.69).
“[Activision] has produced growth in revenue of 6.83% CAGR from 2015 to 2019,” says Justin Cardwell in the Motley Fool. “It knows how to increase its revenue on a consistent basis and keep costs under control. Its strength moving forward is its improved ability to make potential acquisitions. A low debt-to-EBITDA ratio of 1.09 in addition to cash on hand of $5.8bn has helped position the company to look around for the next successful acquisition that might further fuel growth and keep the virtuous cycle going.”
Trefis can see Activision’s share price climb around 10% from its current levels on the back of higher lockdown sales. “The average time spent on gaming is on a rise over the recent months,” it states.
Activision's expected net revenue in 2020
Increased spending in the gaming sector
Overall, helped by new Sony and Microsoft consoles pencilled in for launch later this year, Lango sees more consumer spending on video games, more in-game purchases and more upgrading. Video-game makers will also be able to sell more advertising, helping the industry experience a CAGR of over 8% into 2025.
There are barriers ahead, however. A severe global economic downturn would put a squeeze on discretionary consumer spending. There may also be an inverse reaction to the ending of the lockdown, in which gamers leave the isolation of their lounges and bedrooms and enjoy the freedom of the outside.
But it is equally likely that the surge in demand, as well as the development of esports and streaming, will keep gaming stocks scoring highly in the months ahead.
|PE ratio (TTM)||11.93||33.19|
|Quarterly Revenue Growth (YoY)||23.60%||-16.60%|
EA & Activision Blizzard share price vitals, Yahoo Finance, 4 May 2020
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