Brean Capital Sees Impact From Digital Distribution In Video Games

Brean Capital issued an industry update for video games companies Thursday after the NPD report showed strong console sales in September and the impact of shifting to digital distribution.

Analyst Todd Mitchell noted that "total retail video game industry sales grew 4.1 percent in September to $1.1 billion, buoyed by 136 percent growth in Hardware revenue to $432 million as the next-gen consoles experienced their strongest month since the November launch in 2013."

Mitchell commented that "overall retail software sales fell roughly 34 percent in September to $501.6 million. Weakness was primarily driven by an increasing shift to digital sales, which we believe has grown to about one third of total software revenue."

Brean Capital maintained the following ratings on video game related companies:

Activision Blizzard, Inc. ATVI - Buy, $26 price target

"Risks include the loss of dominance of core franchises and the transition to digital business models pose risks to our outlook for ATVI."

Electronic Arts Inc. EA - Buy, $40 price target

"We see EA’s strategy for transitioning to digital as inherently risky...Not only is their less visibility on this business, ultimately we think it is a more competitive, lower barrier to entrée, market which could see downward pressure on ASPs and margins as it matures."

Take-Two Interactive Software, Inc. TTWO - Hold, no pricet target

"Unstable and unpredictable returns, lack of financial resources, built-in acquisition/activist premium."

Electronic Arts closed at $32.62 Thursday.

Take-Two Interactive Software closed at $21.49 Thursday.