This Game Maker Is Positioned for Growth

Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Electronic Arts (NASDAQ: EA) has enjoyed a wonderful year. Its stock is already up 75%. This fall, next-generation gaming consoles would be hitting the shelves. Xbox One and PlayStation 4 might become the profit drivers for the whole gaming industry. Electronic Arts recently reported its quarterly earnings, beating analysts’ estimates by $0.20 per share. Will the stock gain even more steam as we head into autumn, which is a busy season for the gaming industry?

Waiting for the new generation of consoles

The release of the next-generation platforms would be the biggest catalyst this year. It would spur gamers to try new titles on new consoles, thus pushing sales higher. Electronic Arts is heading into the autumn with proven sports series, including FIFA, Madden, NBA Live, and NHL. Other titles, such as Battlefield 4, Sims 4, Need for Speed Rivals, and Plants vs. Zombies are bets outside of the sports genre.

So far, this tactic has been working well. Gamers become addicted to the series and buy each new release. The competitors use the same strategy. Activision Blizzard (NASDAQ: ATVI) would meet the new platforms with the next iteration of its Call of Duty series. The company is also battling to regain its World of Warcraft users. Activision Blizzard has lost 1.3 million of WoW subscribers in the first quarter, mostly because Chinese players expressed less interest in the game.

Take-Two Interactive (NASDAQ: TTWO) is planning to release the fifth iteration of its Grand Theft Auto in September. In addition to that, the company relies on its existing portfolio of games, including BioShock Infinite, Borderlands 2, NBA 2k13, and Red Dead Redemption. BioShock Infinite is North America's best-selling multi-platform release this year. Take-Two Interactive had recently released an add-on to Civilization V. This portfolio of games provides a predictable income stream. The company recently announced the selling of $250 million of convertible senior notes due 2018. The proceeds would be used to redeem notes that are due 2014. This would allow the company to avoid conversion of those notes, thus protecting shareholders from share dilution.

What’s in the future?

Despite the continuing shift from “serious” games to casual and mobile ones, the companies have had a decent year. As mentioned above, Electronic Arts is up  75%, while Activision Blizzard is up 74%, and Take-Two Interactive is up 50%. The valuations have been rising as well. However, they have not reached huge levels as one could expect given the size of the moves. Electronic Arts trades at 17.5 forward P/E, Activision Blizzard trades at 18 forward P/E, while Take-Two Interactive trades at 15.7 forward P/E.

Activision Blizzard recently announced that it is buying back 85% of Vivendi's stake in the company. The buyback is worth $5.8 billion. Activision Blizzard would pay $4.6 billion in debt and $1.2 billion in stock. The shares have soared on the news, pushing the valuation higher. Activision Blizzard decided to use the low debt rates while they are still available.  

Who would benefit the most from the rise of the new generation of platforms? I think that Electronic Arts would be the biggest winner. The company’s series stand well to gain from the upcoming consoles, as gamers would be testing their beloved franchises on new hardware. Activision Blizzard has more PC-oriented titles. This is a problem as PC sales decline quarter after quarter. Take-Two Interactive has fewer titles than its peers to present, as it is a much smaller company.

The only problem with Electronic Arts is that the stock has risen significantly. There has been no significant pullback so far. Analysts’ mean target price suggests a 7% downside for the company, as well as a 5% downside for Activision Blizzard. At the same time, they are bullish on Take-Two Interactive, suggesting 16.5% upside. 

Bottom line

I think that Electronic Arts is well positioned to profit from the emergence of new gaming consoles. The stock has appreciated fast, so it would be better to wait for a pullback before taking a position in the company.

Activision Blizzard shares have recently soared. While the buyback is bullish for the company, the stock has run up too far too fast. An investor must consider waiting for a pullback before taking a position in the stock.  

Take-Two Interactive is the cheapest company if judged by forward P/E. However, it has to show some solid growth to gain further. Until then, the stock would lack direction.

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Vladimir Zernov 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!

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