Have Video Game Stocks Finally Peaked?

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When Activision Blizzard Inc. (NASDAQ: ATVI) reported its most recent earnings late last week, they were a huge hit. In fact, it could be argued that these earnings signaled a rising tide in this industry. Both Electronic Arts Inc. (NASDAQ: EA) and Take-Two Interactive Software Inc. (NASDAQ: TTWO) hit all-time highs in Monday’s trading session as well. But the question is have these stocks peaked, or can they go even higher?

Activision had a record fourth quarter, with earnings per share (EPS) of $0.65 and revenues totaling $2.01 billion, blowing out the previous outlook given by the company of $0.40 in EPS and $1.86 billion in revenue. The same period from last year had $0.25 in EPS and $1.35 billion in revenue.

Looking at these numbers alone, we can see why investors reacted as they did, pushing shares to new highs. But this was not the only firm that had a record quarter.

EA generated over $1 billion in operating cash flow for this most recent quarter, which is a first in this company’s history. Also, trailing 12-month operating cash flow was a record $1.37 billion. The brokerage firm Wedbush commented on EA:

Of course, we expect EA to continue its pattern of conservative guidance and regular earnings upside. While we think that guidance in the range of $5.2 billion and $4.20 is likely, we think that the company can deliver $200 — 300 million of revenue upside and $0.30 — 0.50 of EPS upside. Foreign currency translation could impact the upside by as much as $150 million and $0.25 or so, leading us to maintain our $5.4 billion and $4.40 estimates for fiscal 2018. We may adjust our estimates three months from now when EA provides initial guidance for fiscal 2018.

Take-Two grew its total bookings by over 50%, to $719 million, versus $475.5 million in the same period of last year. Chairman and CEO Strauss Zelnick went as far as to comment:

Consumer demand for our new releases and catalog titles was strong throughout the period, and players continued to engage significantly with our games after purchase. As a result, we delivered better-than-expected bookings, including our best-ever quarter for recurrent consumer spending, along with double-digit growth in both net revenue and net cash provided by operating activities.

Out the past five years, these three companies performed more or less in step for the first two years. Since that time, Activision took the reins and easily led the group with shares up just over 400%, while EA and Take-Two have performed much closer in this time with a gain of about 275%.

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A few analysts have weighed in on Activision:

  • Jefferies reiterated a Buy rating with a $55 price target.
  • Hilliard Lyons downgraded to an Underperform from Buy.
  • Oppenheimer reiterated an Outperform rating with a $53 price target.
  • Wedbush reiterated an Outperform rating with a $53 price target.
  • Stifel reiterated a Buy rating and raised its price target to $53 from $45.
  • Barclays has a Buy rating with a $48 price target.
  • Mizuho has a $50 price target.
  • Baird reiterated an Outperform rating.

Separately, just a few analysts weighed in on EA:

  • Oppenheimer reiterated an Outperform rating with a $94 price target.
  • Macquarie reiterated an Outperform rating with an $88 price target.
  • Jefferies has a Buy rating with a $110 price target.
  • Mizuho has a Neutral rating with a $94 price target.

Shares of Activision Blizzard were trading down nearly 0.6% at $45.45 on Tuesday, with a consensus analyst price target of $49.73 and a 52-week trading range of $28.55 to $47.64.

EA shares were trading at $86.39. The consensus price target is $94.38, and the 52-week range is $58.10 to $87.49.

Take-Two traded at $58.27, within a 52-week range of $33.06 to $58.76. The consensus price target is $59.94.