How You Should Play These Gaming Stocks
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looking at the historical trend, game makers have always faced “air pockets” whenever any next generation console is launched. 2013 seems to be one of those years, as the console-transition era begins.
Sony recently issued specs of its latest PS4 console. On the other hand, although Microsoft has not officially declared its next-gen console, but looking at Sony's plans for PS4, the company will not wait too long.
This transition phase could impact the sales of the game makers in the short-term. However, the long-term growth of these gaming studios depends heavily on the new hardware.
Activision Blizzard (NASDAQ: ATVI)
The company’s guidance for 2013 was bit disappointing, but I believe the conservative predictions were because of the beginning of the console-transition era. Apart from that, beyond 2013, prospects for the company seem promising.
The company recently announced Destiny, a new first-person shooter for current and next-gen consoles in partnership with Bungie Studios. It is a four-game franchise with bi-annual launches over the course of next eight years. During "off" years, the company should launch expansion packs for the game. This is the first new intellectual property of Bungie Studios since its massively successful Halo franchise for Microsoft.
But unlike Halo, Destiny is not restricted to one console. Destiny has the potential to become a major triple-A franchise and the company forecasts to sell over 15 million units, with heavy focus on digitally downloadable content. This game can generate revenue of $720 million to $1 billion during the year 2014. Additionally, Blizzard is working on its next MMO, currently codenamed Titan, that could essentially replace the World of Warcraft.
Meanwhile, at least half of the company's annual profits are PC-based and not dependent on the ongoing console transition. The company’s Skylanders franchise should offer a cash bridge during the transition. Looking at its past editions, Skylanders: SWAP Force should generate $411 million in global sales through fiscal 2013. Apart from that, its World of Warcraft, Call of Duty, Diablo etc., should continue to help the company move smoothly in the transition.
Electronic Arts (NASDAQ: EA)
The company's performance in the past few years has been weak. It may be because of the expensive acquisitions like PopCap, over-hyped The Beatles: Rock Band release, failed MMO Star Wars: The Old Republic, or due to the recent under-performance of its big brand names such as Medal of Honor, Crysis, Dead Space, SimCity etc.
A part of this under-performance is also due to its CEO, John Riccitiello. In his tenure, the stock has fallen nearly 64% whereas the S&P 500 gained about 7%. Riccitiello can be credited for rationalizing EA’s franchises, bringing the company’s title count from 65 games to around 15 games, and taking the company into the digital era. However, decisions like spending over $1 billion on mobile and social assets and another $200 million on Star Wars MMO development costs have affected the operating margin expansion drastically.
With Riccitiello gone, I feel that the new leadership could bring in some urgently needed tailwinds to the stock. Additionally, the company has stronger titles scheduled for fiscal 2014 and a matured strategy for digital content. The lineup includes first-person-shooter (FPS) in Battlefield 4, titles like Madden, FIFA, new releases for UFC, NBA from EA Sports, and Dragon Age, a BioWare title set in the Mass Effect universe. All these are compatible with next-gen consoles of Sony and Microsoft.
The company has endured some difficult times, and the new leadership and the upcoming console-transition can bring in some traction to the stock. However, I am Neutral on the stock till I see something concrete coming from these initiatives.
Take-Two Interactive Software (NASDAQ: TTWO)
Fiscal year 2014 for the company seems really strong. The reason behind this optimism is the recent launch of Bioshock Infinite and also the upcoming launch of the much awaited Grand Theft Auto V in September 2013.
According to vgchartz.com, about 605,000 units of Bioshock Infinite were pre-ordered before its launch by the fall of March, 2013 and total units sold in the lifetime of the game should fall between the range of 1.9 million to 2.6 million. This shows the popularity of the game among and its potential in the future.
Digital content sales will provide an incremental revenue stream for Bioshock Infinite. A Bioshock Infinite Season Pass provides access to three upcoming add-on packs for roughly $20, a three for two deal. While the game play and visuals for Bioshock Infinite appear very impressive, some of the game’s positive buzz is attributable to the return of Ken Levine, who created the first Bioshock game.
Apart from that, the company will launch one of the most awaited and anticipated games of all time, the Grand Theft Auto V in September 2013. This game should set some new industry records because the company has sold nearly 25 million copies of its predecessor Grand Theft Auto IV. Even with a modest performance, this game has the ability to shift the paradigm of the company's operations. The game's launch is somewhat delayed by the company, which may be because of the probable modification in the game quality for a dual generation launch.
The investing window
The transition period may seem difficult for these gaming stocks, but the fan base they carry should help them get through this swiftly.
Electronics Arts has been in turmoil for some time now due to the bad decisions of top-level management. The Battlefield franchises should provide some upside in 2014, but until more clarity is obtained, I'll remain neutral on the stock.
As for Activision and Take-Two, both have robust games lined-up for the future and moreover, they should be compatible with the next-gen consoles which should give these stocks substantial upside in the future. I am bullish on both of them.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!