The Electronic Entertainment Expo, commonly referred to as E3, which is a premier trade event for the video game industry, ended last week and top analysts are super-bullish. With gaming sales poised to grow an incredible 50% year-over-year in 2018, and grow annually a stunning 27% between 2017 and 2020, there could be some big upside for the top companies in the industry.
In new research report, Oppenheimer, like many on Wall Street, came away from E3 very positive on not only the sector as a whole but on all the titles poised to hit stores this year and in 2019. The report said this about the conference:
After five days of non-stop bombardment of press events, private meetings, and game play demos, it is hard not to get carried away with the faster, bigger, and louder productions AAA Studios are offering. While the adrenalin rush was much appreciated, we believe more rational investors should pay attention to the following three points we took away from E3 : 1) bifurcating publisher strategies, 2) First half 2019 has an especially strong release slate for shooters, 3) the shift to multiplayer/squad/co-op modes. Lastly, we highlight two games; Fallout 76 and Cyberpunk 2077 that may have general and material impact on most games from our coverage universe.
The Oppenheimer analysts have shares of three companies that were at E3 rated Buy, and while not suitable for everybody, they may be great addition to aggressive growth accounts.
Activision Blizzard
This is a top pick on Wall Street and Oppenheimer remains very positive on the shares. Activision Blizzard Inc. (NASDAQ: ATVI) develops and publishes online, personal computer (PC), video game console, handheld, mobile and tablet games worldwide. The company develops and publishes interactive entertainment software products through retail channels or digital downloads and downloadable content to a range of gamers.
With its new Blackout mode, many analysts think “Black Ops 4” looks like the most exciting Call of Duty in years. The analysts at Oppenheimer are positive on the company and noted in their report:
We model a four-year revenue and earnings per share compounded annual growth rates of 15% and 20%. We also model significant non-GAAP operating margin expansion from 2015 to 2019. Our projections are driven by 1) higher penetration of digital revenues, 2) strong growth of core franchise and contribution from new titles, 3) potential upside to revenues from advertising and esports, 4) consistent capital returns from share repurchase and dividends.
Shareholders are paid a small 0.44% dividend. The Oppenheimer price target for the shares is $87, and the Wall Street consensus target is $75.88. The stock traded early Monday at $77.15.
24/7 Wall St.Electronic Arts
This leading video game developer should benefit from not only the continuing rise in new console sales but the rising trend of mobile gaming. Electronic Arts Inc. (NASDAQ: EA) produces top-selling games and related content and services under the EA brand in various categories, including action-adventure, role-playing, racing and first-person shooter games.
Electronic Arts is realizing a greater percentage of revenues from digital platforms, which may enhance margins and lead to more sustainable revenue growth. Key franchises for the company include Madden, FIFA, Need for Speed, Battlefield, Star Wars Battlefront, Mass Effect, Dragon’s Age and The Sims.
Electronic Arts is now the third straight U.S. video game publisher to post strong results, despite Fortnite’s strength, suggesting Fortnite is more about expanding the market than cannibalizing it. The company’s guidance seems conservative and the fiscal 2019 setup seems very strong with the release slate anchored by FIFA and Battlefield, which are the company’s two biggest franchises.
The company had a big E3 presence as well, and the analysts noted this:
We expect that 12 to 18 months from now, our target price reflects a P/E multiple of about 26x our fiscal 2019 estimate of $5.37, and an EV/EBITDA multiple of 20x our EBITDA per share estimate of $6.92 for the same period. These multiples are at a premium to those of other video game companies due to what we see as the company’s enhanced ability to deliver consistent growth revenue and free cash flow as well as the potential upside to management guidance. The major risk we see to the EA story is that the console refresh cycle fails to meet investor expectations over the next few years, and that sales of games for older consoles fade faster than those sales can be replaced by new console software.
Oppenheimer has a $140 price target for the stock, and the consensus target is $143.24. The stock traded early Monday at $143.85, so both price targets may be going higher soon.
24/7 Wall St.Take-Two Interactive Software
This is a top video game producer that has cashed in with some super-hot titles. Take-Two Interactive Software Inc. (NASDAQ: TTWO) is a publisher and distributor of interactive software for gaming platforms from Sony and Microsoft and for the PC. The company is headquartered in New York, with development studios located around the world. Key franchises include Grand Theft Auto, Red Dead, Civilization, Borderlands, and Bioshock, as well as several licensed sports products such as NBA and WWE.
Since launching in 2013, the Grand Theft Auto (GTA) franchise has sold over 95 million units, making it perhaps the all-time highest grossing and most profitable entertainment product for any form of media. Five years after launch, the GTA franchise accounted for nearly 40% of the company’s fiscal 2018 revenue, proving these major franchises can deliver long, high-margin revenue tails.
Oppenheimer noted this in the research and addressed concentration concerns:
Our price target for the company is based on a 27x multiple applied to our normalized model earnings of $5.00 per share. This normalized earnings number reflects: 1) a transition to a consistent annual game release schedule driven both new IP and accelerated existing IP sequel development; 2) continued growth and increasing revenue mix share of higher margin, better visibility recurring revenues. We see risks to our price target in: 1) high revenue concentration around GTA V—faster than expected decline could materially impact Take Twos top line; and 2) our thesis of revenue consistency factors in the release of inherently risky new IP and franchise refreshes with long term resource-heavy development cycles.
Oppenheimer has set its price target at $135. The consensus price objective is $130.45, and shares traded at $120.00 Monday morning.
The big three of gaming were out in full-force at the gigantic E3 event in Los Angeles. While it’s hard for some investors to wrap their arms around the significance of gaming, the short answer is it is massive and expected to continue to exhibit huge growth for years to come.
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