Jefferies Sees Massive Upside in 3 Entertainment Stocks

Following a year in which many Americans were forced either by restrictions or by good sense to stay home more, several consumer discretionary industries have prospered. Streaming video services, home delivery of food and groceries and, of course, technology to help with school and work from home were among goods and services in high demand last year.

Looking at the interactive entertainment industry, analysts at Jefferies offer four key takeaways from their recent review:

  1. The video game industry is “as strong as ever” and game players aren’t going to stop when lockdowns end.
  2. Multiple tailwinds from “broader societal acceptance, better monetization of engagement, and expansion opportunities for the best IP,” or, intellectual properties.
  3. Expected step increases on in-game spending
  4. “[V]aluations aren’t cheap, but reasonable.”

Analysts at Jefferies have resumed or initiated coverage on five stocks related to video games and two music companies. Here’s a look at the three video game makers, one mobile video game maker, one music streaming company, and one music label Jefferies reported on Thursday.

Activision Blizzard

Jefferies maintained both its Buy rating and its $120 price target on Activision Blizzard Inc. (NASDAQ: ATVI). The analysts continue to believe that Activision has “best-in-class” IP and that the company should see “step function increases” as it builds ecosystems that “expands both the audience and longevity.”

The company’s Call of Duty franchise is a “great example of ecosystem,” according to Jefferies. The company has expanded its user base from annual sales of 30 million CDs to about 430 million free downloads, which Jefferies estimates grew revenue from the franchise from $1.4 billion in 2018 to more than $3 billion last year.

In sum, here’s the analysts’ outlook for Activision:

The next several years should see the fruits of the company’s labor in reorganizing around its core IP and building a strategy of expanding its player base and monetization models. For the first time in a decade, we expect to see several consecutive years of top line growth and an even faster bottom line rate.

The Jefferies price target is higher than the $113.20 consensus target, and the potential upside to a trading price of around $93.70 early Friday morning is 28% for the Jefferies target.

Activision’s stock traded down about 0.8% Friday afternoon, at $92.92 in a 52-week range of $62.34 to $104.53. The company pays an annual dividend of $0.47 (yield 0.5%).

Electronic Arts

Jefferies upgraded its rating on Electronic Arts Inc. (NASDAQ: EA) from Hold to Buy and jacked up its 12-month price target from $140 to $165 per share. The analysts say they “believe investors have been too negative and underappreciated the underlying assets at EA. We see green shoots of returning to more normalized growth.”

The analysts are upbeat on the $2.1 billion acquisition of Glu Mobile and believe that the deal, which is expected to close in June, may take a while to demonstrate projected synergies and benefits but that the deal “will be a successful one.”

Even though the forced stay-at-home audience for games is about to fade away and Electronic Arts is about to lose its exclusive license to make Star Wars games, Jefferies proposes another way of looking at the company’s situation:

[W]e see a robust visible pipeline, easier comps than its peers, and a big redemption title launching soon that couldn’t be in a better position. With low expectations and reasonable valuation, we upgrade to Buy.

Jefferies’ price target of $165 is above the consensus of $158.70 and suggests upside potential of about 17% to a Friday price of around $141.10.

Electronic Arts’ stock traded up less than 1% Friday morning, at $141.85 in a 52-week range of $110.15 to $150.30. The company pays an annual dividend of $0.68 (yield of 0.48%).

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