The pandemic is showing no signs of slowing down. The number of coronavirus cases around the world has hit 40 million recently, and the United States and Europe are struggling with the significant increase in cases with each passing day. This is an indication of a second wave which could surge leading into the upcoming holiday season. From anti mask campaigns to increasing crowds during election campaigns, and no effective vaccine available, a second spike could lead to increased fatalities.
European governments have already started re-introducing restrictive measures and the United States might soon follow suit to contain the surge in cases. Irrespective of the government initiatives, people might prefer to stay at home and limit exposure to the virus.
As a result, demand for indoor entertainment, which has gained significant traction over the past eight months, is expected to reach new highs in the near future. Video gaming stocks such as Activision Blizzard, Inc. (ATVI), Electronic Arts, Inc. (EA), and Take Two Interactive Software, Inc. (TTWO), which generated record growth in the last reported quarter, are well positioned to soar even further in the upcoming months.
Activision Blizzard, Inc. (ATVI)
ATVI develops and distributes content and services on video game consoles, personal computers (PC), and mobile devices in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. Operational since 1979, the most famous product franchises owned by ATVI include Call of Duty, World of Warcraft, Diablo, Hearthstone, Overwatch, and Candy Crush. As one of the most popular gaming platforms worldwide, ATVI had a monthly active user base (MAU) of 428 million as of June 30th.
On August 6th, ATVI raised approximately $2.0 billion through a senior note offering, which is expected to meet its current debt liabilities and general corporate purposes. On October 9th, ATVI entered into a strategic partnership with International Business Machines (IBM) as a presenting partner of the Overwatch League grand finals, which is the first esports league with 20 city-based teams. This multi-year deal brings IBM’s cloud computing and AI technology to ATVI e-sports.
The rising popularity of gaming drove ATVI’s results in the second quarter that ended June 2020. ATVI’s net revenues increased 37.8% to $1.9 billion over this period. Net revenue from digital channels increased 45.8% from the year-ago value to $1.6 billion. Operating metrics such as net bookings of $2.1 billion improved 71.9% from the same period last year. This can be attributed to the 80.1% and 76% year-over-year increases in net bookings from digital channels and in-game net bookings, respectively. EPS rose 74.4% from the same period last year to $0.75.
The consensus EPS estimate of $0.64 for the third quarter ended September 2020, indicates a 100% rise year-over-year. Also, ATVI has an impressive earnings surprise history, as it beat the street EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $1.7 billion for the upcoming quarter, indicates a 39.8% growth from the same period last year.
ATVI has gained more than 70% to hit its 52-week high of $ 87.73 in August since hitting its year-to-date low of $$50.51 in March.
How does ATVI stack up for the POWR Ratings?
B for Trade Grade
B for Buy & Hold Grade
B for Peer Grade
B for Industry Rank
B for Overall POWR Rating.
ATVI is also ranked #1 out of 15 stocks in the Entertainment – Toys & Video Games industry.
Electronic Arts, Inc. (EA)
EA is a major video game developer and distributor, publishing games in various genres. It also provides advertising and licensing services, as well as engages in third party distribution. EA is the maker and distributor of popular games such as FIFA, Need for Speed, Madden NFL, and Star Wars Jedi.
EA Sports Madden NFL 21 sales grew nearly 20% year-over-year in its first week in September. More than 17 million games were played worldwide in the new mode ahead of the NFL season. On October 9th, EA launched FIFA 21, which attracted 3.6 million players on the first day itself. It also launched a new subscription service EA Play earlier in August.
In the first fiscal quarter that ended June 2020, EA delivered 30 new content updates, over 50 mobile updates and 2 major game expansions. Net revenue for this quarter increased 20.8% year-over-year to $1.5 billion. Gross profit rose 14.7% year-over-year to $1.2 billion. Operating income of $471 million increased 13.4% for the same period last year. Player acquisition for FIFA and Madden NFL rose 100% and 140% year-over-year, respectively, over this period.
The consensus EPS estimate of $5.60 for the current year indicates a 16.4% improvement year-over-year. The company has an impressive earnings surprise history as well, as it beat the street EPS estimates in each of the trailing four quarters. Analysts expect revenue to grow 16% in the current year to $6.1 billion.
EA has gained more than 70% since hitting its 52-week low of $85.69 in March. The stock hit its 52-week high of $147.36 in August.
EA is rated as a “Buy” in our POWR Ratings system, with a “B” in Trade Grade, Buy & Hold Grade, and Industry Rank. It is ranked #2 out of 15 stocks in the Entertainment – Toys & Video Games industry.
Take Two Interactive Software, Inc. (TTWO)
TTWO develops and markets interactive gaming and entertainment solutions under Rockstar Games, 2K labels, private division and social point labels. TTWO’s games are designed for console gaming systems as well as computers and smartphones.
TTWO’s impressive fiscal first quarter performance adequately represents the company’s fundamentals, as its net revenue grew 54% year-over-year to a record of $831.3 million. Its adjusted unrestricted operating cash flow of $324 million increased 595% from the year-ago value, while net cash from operating activities increased 310% during the same time to $445.4 million. TTWO’s net bookings rose 136% year-over-year to a record of $996.2 million. Its EPS increased 88% from the same period last year to $0.77. On August 18th, TTWO acquired Playdots, Inc. for $192 million in cash and stock.
Analysts expect TTWO’s EPS to rise 14.6% next year to $5.58. Moreover, the company beat street EPS estimates in three out of trailing four quarters, which is impressive. The consensus revenue estimate of $3.4 billion for next year indicates 10.7% growth year-over-year.
TTWO has gained more than 80% since hitting its 52-week low of $100 in March. The stock hit its 52-week high of $180.61 in August.
TTWO is rated a “Strong Buy” in our POWR Ratings system, consistent with its impressive financials and sound business model. It has an “A” in Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” in Industry Rank. Out of 15 stocks in the Entertainment – Toys and Video Games industry, TTWO is ranked #3.
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ATVI shares were trading at $81.01 per share on Monday afternoon, up $0.39 (+0.48%). Year-to-date, ATVI has gained 37.23%, versus a 8.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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