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Industry Spotlight

What’s impacting EA, Activision, Sony and Take-Two’s share prices?

The share prices of Activision Blizzard [ATVI], Electronic Arts [EA], Sony [6758] and Take-Two Interactive Software [TTWO] have been popular plays among investors and traders this year.

Since the start of the year, through to 31 July, EA’s share price has risen by roughly 32%, and is up nearly 63% since its market sell-off low. Activision Blizzard’s share price, meanwhile, has gained 41% YTD and 59% since its March low.

Take-Two Interactive’s share price is also in the green for the year. The stock has risen around 34% since early January, and 64% since the 52-week low it fell to in March. 

64%

Take-Two Interactive's share price rise since its March low

  

Amid worldwide lockdowns and shelter-in-place orders, people have been left with limited choices when it comes to entertainment. Gaming, naturally, has emerged as a winner in a world where leaving the house is tricky, a boon for share prices like EA’s.

As a result, the industry's gaming juggernauts have made significant gains in the last few months. But not every gaming stock has performed as well. Sony’s share price, for example, is up 48% since the 52-week low that it dropped to during the sell-off – but has gained a relatively less impressive 12% overall so far this year. The most logical explanation for this is that Sony earns its revenue from several segments, and is thus exposed to more volatility and economic uncertainty. 

With EA having just reported its quarterly results, and the others due to report imminently, how can investors and traders expect these stocks to perform?

 

Following EA’s earnings beat

On 30 July, EA posted its Q1 2020 results, stating that it has been “an extraordinary quarter”. The company announced forecast-crushing earnings of $1.25 per share, compared to analyst estimates of $0.80 a share. Revenues were also up 20% year-on-year to $1.46bn.

By the end of the day, EA’s share price was up by nearly 2%.

$1.46billion

EA's Q1 revenue - a 20% YoY rise

  

In its fourth quarter of fiscal 2020 results, Electronic Arts posted revenue of $1.39bn, a 12% increase on Q4 2019’s revenue of $1.29bn – Wall Street was expecting the figure to be $1.19bn. Revenue for the full year, meanwhile, was up 11% year-over-year at $5.54bn.

It’s expected that the other game makers will post similarly stellar results for the upcoming quarter.

Although lockdowns have started to ease in some places, which could lead to a fall in gaming sales, Gerrick Johnson, an analyst at BMO Capital Markets, believes that the stay-at-home tailwinds will persist for some time yet. “Given the sticky nature of video games, we expect engagement levels to stay high and for new and returning lapsed players to continue to play,” he wrote in a note to clients in May. 

“Given the sticky nature of video games, we expect engagement levels to stay high and for new and returning lapsed players to continue to play” - Gerrick Johnson, BMO Capital Markets analyst

 

Johnson upgraded his rating for Take-Two to outperform and raised his share price target from $120 to $170. The company also received an overweight rating from Yung Kim, an analyst at Piper Sandler, as did EA and Activision Blizzard.

It’s the latter that Kim believes will be the industry’s standout stock. Barron’s recently reported that Kim sees upside potential lying in Activision Blizzard’s new digital monetisation model, where users can pay for in-game upgrades.

On Sony, Andrew Uerkwitz, an analyst at Oppenheimer, wrote following the PS5 launch back in June: “The striking console plus a strong slate of exclusives gives us confidence [it] is well-positioned for strong gaming growth over the next several years.”

 

Winners of circumstance?

In many ways, the gaming industry is fortunate that COVID-19 struck when it did. The industry is very cyclical and software (game) sales rely heavily on hardware.

The Playstation 4 – and Microsoft’s [MSFT] Xbox – are coming to the end of each product’s cycle, but had the coronavirus pandemic started in the second half of calendar 2020, it likely would have impacted the upcoming launches and sales of the Playstation 5 and Xbox Series X.

According to a Bloomberg report, Sony recently ramped up production of the PS5 on the basis that it will now shift double the number of units originally forecast. 

The launch of new hardware should be a sales boon for games developers and publishers. A number of popular titles, including Take-Two Interactive’s Grand Theft Auto V, will be ported to the new console. It’s possible that another one of its titles, Red Dead Redemption 2 — the biggest selling game of 2018 — will follow. 

Activision Blizzard, meanwhile, should be boosted by the impending release of Call of Duty: Black Ops 5. The Call of Duty series is one of the most valuable franchises in gaming. 

As for Electronic Arts, the release of FIFA 21 in October and Madden NFL21 in August will be welcome news and both are likely to give investors confidence in the stock. 

There is a caveat, though: the gaming business can be fickle. A case in point is when EA lost its FIFA cover star Ronaldo after Juventus signed an exclusive licensing deal with Konami [KNM], developer and publisher of the Pro Evolution Soccer series. As the news emerged in July 2019, EA’s share price fell 3.5% – wiping $750m from its market cap.

 

Past performance

Like EA, Take-Two will also be announcing results off the back of an impressive previous quarter. It posted a significant revenue beat in Q4, with net bookings — a way the game industry calculates adjusted revenue — at $729m, up 49% year-over-year.

For its first quarter of 2020, Activision Blizzard posted net bookings of $1.52bn, a 21% year-over-year increase, while in-game purchases rose 20% to $956m. Earnings per share were $0.76, double what analysts had been expecting. 

$1.52billion

Activision Blizzard's net bookings in Q1 - a 21% YoY increase

  

On the contrary, Sony’s gaming division generated almost ¥2tn in revenue in fiscal 2020, a 14% decrease compared to fiscal 2019. Operating profit also fell 23% to ¥238m. The company shifted 13.6 million Playstation 4 units over the 12 months versus 17.8 million sold a year earlier. 

All four stocks have a consensus buy rating on CNN Money.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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