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.
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.