Why Merrill Lynch Is Growing More Bullish on Video Games

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Video games have always been the next step in interactive media, whether you want to play a game for a compelling story with thrilling cutscenes or you just want to blow off some steam and cut through hordes of aliens with a chainsaw. Video games have become a large part of our culture, similar to movies in how we look forward to them and even talk about them.

One key analyst took a look at a few of the major companies in this field and where they stand to go from here.

Overall, Merrill Lynch noted that sales for the top 10 selling games were down 23% year over year, while catalog titles outside the top 10 were down 28% from last year. Software on Sony consoles were down 15%, while sales on Microsoft were down 23%. The firm saw retail data as generally in line for Activision Blizzard Inc. (NASDAQ: ATVI), as well as in line to below for Electronic Arts Inc. (NASDAQ: EA) and Take-Two Interactive Software Inc. (NASDAQ: TTWO), although with few releases from publishers in the first quarter, digital trends will be a more important driver of overall results.

Merrill Lynch reiterated a Neutral rating for Activision Blizzard and raised its price target to $51 from $47. The firm detailed in its report:

Activision’s US retails sales were down 39% year over year (y/y) in Feb. compared to down 21% y/y in Jan. In-line with prior months, CoD units were down 54% y/y (ex. bundles) while average sales prices (ASPs) were up 8%, but overall CoD retail sales were down 50% y/y, though likely offset by digital mix shift and add-on content. Overwatch was Activision’s second highest selling title in Feb. after CoD while Skylanders units were down 30%+ y/y. quarter to date, NPD’s US retail sales data shows Activision tracking in-line with our est. for worldwide product sales rev. to be down 30% y/y in the first quarter, but digital is a much more important first quarter driver.

The brokerage firm reiterated a Neutral rating for EA and raised its price target to $94 from $86. Merrill Lynch said in its report:

EA’s US retail sales were down 36% y/y in February vs. up 7% y/y in Jan. on a tough comp from Zombies vs Plants. Madden 17 units were down 19% y/y and ASPs declined while Battlefield units were down double digits (ex-bundles) vs. Battlefront in ’16. FIFA units were flat y/y, but were likely up due to digital mix shift. After two months, NPD’s retail sales data shows EA tracking below of our estimate for worldwide packaged goods revenue to be up 10% y/y in the fiscal fourth quarter, but Mass Effect will be a key title in March.

Take-Two was given a Buy rating by Merrill Lynch and its price target was raised to $67 from $61. The firm commented:

US sales trends declined m/m from up 8% y/y in Jan. to down 26% y/y in Feb. on unit weakness across key titles (GTA V, NBA 2K, WWE 2K). Although the 3rd most popular title in Feb, GTA V unit sales were down double digits y/y and ASPs were down low teens. Quarter to date, Take-Two’s US retail sales are tracking below our est. for product sales rev. to decline 3% y/y. Digital trends for GTA 5 and NBA will be more important for Take-Two stock than physical sales, in our view, until the Red Dead release in the Fall.

While Merrill Lynch has been surprised at the year -o-date group strength, it still sees Take-Two as the biggest opportunity in the sector, given a lower relative 2017 multiple, more title upside potential with Red Dead, and an earlier digital monetization cycle.

Shares of Activision Blizzard were last seen at $49.21 on Friday, with a consensus analyst price target of $50.63 and a 52-week trading range of $31.48 to $49.57.

EA shares were trading at $89.79. The 52-week range is $61.10 to $89.88, and the consensus price target is $94.38.

Take-Two traded at $59.44, in a 52-week range of $33.06 to $60.20. The consensus analyst target is $59.94.