The gaming world has seen a handful of remarkable changes in recent years. The rise of gaming subscription services, next-generation consoles (Xbox Series X and PlayStation 5), video-game streaming (xCloud and Luna), and consolidation activity (as well as attempts) have been among the most notable. Such trends, I believe, have tilted the tables in favor of bigger firms with bigger budgets.
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Indeed, it’s a good time to be a gamer, with libraries of content available under one monthly subscription. For the gaming pure-plays, though, the competitive environment seems to be getting tougher. After all, it’s harder to justify paying $80 for one new game when you could just settle for the hundreds of titles on a Microsoft (NASDAQ:MSFT) Xbox Game Pass subscription.
Therefore, let’s consider two video-game pure-plays that Wall Street analysts continue to stand by, even as recessionary headwinds approach.
Electronic Arts (NASDAQ:EA)
Electronic Arts stock hasn’t done much for investors over the past five years, with shares falling more than 9.7% over the timespan. More recently, investors have been losing patience, as shares have slipped 10% year-to-date on the back of tough third-quarter results. The company came up short in Q3, with $2.50 EPS missing the $3.05 consensus and revenue missing as well. After sluggish results, I am neutral on the name.
On top of EA’s sluggish results, the release of its game Star Wars Jedi: Survivor was also announced to be delayed by more than a month to late April from mid-March. Nevertheless, that’s not much of a delay. Even with a wealth of other options to consider, I think it’s safe to say that most gamers (especially Star Wars fans) will be ready to hit the buy button when the time comes.
The shutdown of Apex Legends and Battlefield Mobile was also quite discouraging. Apex, in particular, was a polished title that received favorable reviews. Still, EA likely doesn’t see a pathway to greater growth from the platform.
I think the mobile game shutdowns go to show how difficult it is to hit the spot with casual audiences in the mobile-gaming market. Just because a hit PC or console title is successful does not mean it’ll translate to big gains in mobile.
Cancellations and shutdowns are not helping EA stock amid its tailspin. Regardless, many analysts are sticking with the name. Despite the Q3 miss, Jefferies analyst Andrew Uerkwitz maintained his “Buy” rating, noting that Q3 was a “rare miss” and that recent headwinds aren’t unique to EA. Also, at 29.8 times trailing earnings, EA stock is one of the cheaper gaming stocks.
What is the Price Target for EA Stock?
Wall Street has EA stock at a Moderate Buy. After the latest downgrade from Deutsche Bank, EA sports 15 Buys and eight Holds. The average EA stock price target of $133.39 entails an 18% gain ahead.
Activision Blizzard (NASDAQ:ATVI)
Activision Blizzard is arguably one of the strongest video game pure plays in the U.S. market. The company is at a crossroads right now as Microsoft looks to do everything it can to get regulators to approve its $69 billion acquisition of Activision Blizzard. I remain bullish on the stock.
Recent action in ATVI stock suggests a relatively low chance that Microsoft will get permission to buy Activision Blizzard. With that, I think news of a blocked deal won’t be too dramatic for shares. After all, the stock is nowhere close to its $95 per-share takeover level. Regardless of what happens, it’s clear that Activision Blizzard is a very sought-after target, given its top-tier gaming assets.
The company finished off 2022 with a bang, thanks to Call of Duty: Modern Warfare II, which set a sales record.
In an era of affordable video-game subscriptions, it’s getting harder to compete in gaming for the pure-play firms that are anything short of truly exceptional. Activision, I believe, is such an exceptional firm, and it’s not a mystery why Microsoft wants to scoop it up.
At the end of the day, there will always be a place for splurging on a single title that delivers. However, such titles tend to cost considerable sums to develop. And the returns on that investment vary greatly.
At this juncture, Activision seems better able to command a greater return than EA. For that reason, I prefer the name even at a lofty 40.5 times trailing earnings multiple. Deal or no deal, I think ATVI is best-in-breed.
What is the Price Target for ATVI Stock?
Wall Street has a “Strong Buy” on the name, with 12 unanimous Buys. The average ATVI stock price target of $93.45 implies 17.5% upside potential.
Conclusion
It’s unclear when the tides will turn for gaming plays; they’re in a rut right now. Still, Wall Street analysts have confidence in them for the year ahead.
Over the next 10 years, I think big-tech firms could consolidate the video-game industry to beef up their services businesses and perhaps get an edge in the metaverse. For now, I believe gaming stocks are too cheap to count out, even as conditions become tougher.
