Analyst Sees Bright Future For Activision And Take-Two Thanks To COD, GTA

What are millions of people to do in quarantine? Video games. One analyst sees a strong future for at least two of the industry’s juggernauts.

The Ratings

Wells Fargo analyst Brian Fitzgerald initiated coverage on:

• Activision Blizzard, Inc. ATVI with an Overweight rating and $75 price target;
• Electronic Arts Inc. EA with an Equal-Weight rating and $120 target; and
• Take-Two Interactive Software, Inc TTWO with an Overweight rating and $150 target.

The Activision Blizzard Thesis

Activision Blizzard built a sizeable following with its chart-topping "Call of Duty" and "Candy Crush," and then it expanded its gamer base with a mobile version of Call of Duty and Overwatch League eSports.

“ATVI’s strategy of leveraging existing (owned) IP helps give it the highest profitability among the Big 4, providing ample free cash flow to fund game development, capital return, and strategic M&A, in our view,” Fitzgerald wrote in a note.

While some suspect that the portfolio will stale with no new titles and no annual sports products, particularly as free-to-play shooter games raise the competition, Wells Fargo considers it a safe bet given its loyal fan base.

“We think ATVI’s four strategic growth pillars and wholly owned-IP are the right recipe for relatively low-risk growth in a frequently unpredictable, hit-driven video game market,” the analyst wrote. “ATVI’s franchises have withstood the test of time, reducing new concept failure risk and unproductive R&D spend when keeping existing audiences engaged via live services and an improved cadence of content releases.”

The Electronic Arts Thesis

Fitzgerald suspects that live services are growing faster than video games and comprise a majority of EA’s net recurring bookings. He expects new live-services franchises to drive growth as FIFA strikes its market peak.

“Aggressive investment in new live services IP should help provide the needed multiple expansion to drive EA’s stock returns,” he wrote.

The analyst sees particular opportunity in the Apex Legends franchise, as well as the live-service FIFA Ultimate Team.

“Meanwhile, EA’s lucrative annual sports franchises may limit downside risk in the stock because of their dominant positions in the sports licensing value chain,” Fitzgerald wrote.

The Take-Two Thesis

Take-Two’s "Grand Theft Auto V" is the best-selling video game ever, and Fitzgerald expects the sixth edition to rank highly among premium AAA games.

“We think a successful release of GTA VI would raise the steady state level of net bookings at TTWO by 33-50%, with significant OpEx leverage boosting operating income through the $600 million ceiling,” the analyst wrote. “...A GTA VI would launch into a larger installed base of consoles than did GTA V, an additional tailwind, and with about 35-40 million MAUs currently playing GTA Online, we do not expect a meaningful drop in RCS bookings during the transition.”

Notably, "Red Dead Redemption 2" did not live up to Wells Fargo’s expectations, and Fitzgerald said Take-Two’s limited pipeline warrants pre-GTA growth concerns.

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Screenshot courtesy of Activision Blizzard.