New consoles means new customers and sales in the video game space, which is very good news for these 3 publishers.
This year’s hottest holiday gifts are about to be released.
Microsoft’s new Xbox will debut on November 10, while Sony’s latest Playstation will be released just days later on the 12th.
With new gaming consoles rapidly approaching, videogame stocks are looking better than ever. And one analyst said this week three big names in the space look particularly attractive.
MKM Partners analyst Eric Handler wrote in a note this week that Activision Blizzard (NASDAQ: ATVI), Electronic Arts (NASDAQ: EA), and Take-Two Interactive (NASDAQ: TTWO) have strong multiyear growth prospects, and the launch of the two next generation consoles will only bolster their stocks.
“Not only are we anticipating still strong engagement will produce another round of ‘beat-and-raise’ results (and we have raised estimates for Activision, EA and Take-Two to reflect this view), but we believe the soon arriving new console cycle will carry key catalysts which should enhance multiyear growth prospects,” Handler wrote.
The release of new consoles every six or seven years historically has ushered in a new wave of innovation, customers, and sales in the gaming space, with videogame publishers reaping much of the reward, and this year promises to be no different.
Pre-orders for both the new Xbox and PlayStation 5 sold out in a matter of hours in September, despite their hefty $500 price tags, promising demand will be strong when the consoles hit stores. What’s more, with the coronavirus pandemic shuttering movie theaters and keeping people stuck at home, videogame sales are forecast to rise 19% this year in the U.S. to $45.6 billion.
“It’s a pretty significant moment for our industry,” said Lura Miele, chief studios officer for game publisher Electronic Arts. “We’re interactive, not passive. There are new generations of players that prioritize gaming over other mediums.”
What’s also good news for publishers is that both new systems will offer a console version that doesn’t include a disc player, and with games going digital, $5 to $6 of margin will be added to each game for publishers.
Beyond the new consoles, Handler wrote that there could be further consolidation in the industry following Microsoft’s $7.5 billion acquisition of Bethesda Games parent company ZeniMax last month. One of the ways Microsoft and Sony attract players to their consoles is through exclusive game titles, and with Google-parent Alphabet and Amazon both having their own cloud gaming services, Activision, EA, and Take-Two could be attractive acquisition targets for any of these tech giants.
Handler isn’t the only analyst bullish on the videogame publisher space. Deutsche Bank analyst Bryan Kraft said in a note out this week that the major publishers “have further upside” ahead thanks to positive earnings outlooks and “stay-at-home behaviors” of players amid the coronavirus pandemic.
In particular, Kraft likes Activision, upgrading the stock from Hold to Buy and boosting his price target from $75 to $90 – 11% higher than the price as of this writing.
Kraft wrote that Activision’s Call of Duty: Warzone, its free-to-play battle royale mode that has gained more than 75 million players since March, “represents a fundamental positive shift for the 17-year-old franchise, and the business’ trajectory is now structurally better than it was entering 2020.”
“We believe that ATVI will apply learnings and models from its success with Warzone to additional franchises, including potentially offering a free-to-play ‘player vs player’ version for the new Overwatch game (as a hypothetical example), and certainly supporting the game with a strong pipeline of incremental content to support live services,” Kraft concluded.