Wedbush Securities Vice President of Equity Research Nick McKay, who covers the entertainment software and gaming sectors, shared his insight on some of the biggest movers of the industry, such as Electronic Arts Inc EA, Nintendo ADR NTDOY, GameStop Corp. GME, and Take-Two Interactive Software Inc. TTWO.
During an interview with host Joel Elconin on Benzinga's PreMarket Prep on Wednesday, McKay said the video game sector has been "a compelling sector to watch for the last 10 years plus and should be for the foreseeable future."
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The analyst talked about esports leagues and the intention of many big publishers, such as Activision Blizzard Inc ATVI to make big money with its own esports league.
But the electronic sports industry is not as solid as it can appear: "It's been difficult for somebody to come up with a compelling business model for E- Leagues," McKay stated. "I qualify them as advertising for some of the larger games from these big publishers, that use them to bring in new users who perhaps wouldn’t be interested in the titles without such leagues."
What's The Sentiment About Electronic Arts, GameStop, Take-Two Interactive, And Nintendo?
When asked about Electronic Arts (EA), McKay recalled the video game company, which has its headquarters in Redwood City, California, is gearing up for the highly anticipated release of Star Wars Jedi: Survivor on April 28, and early reviews are already looking positive.
EA's previous Star Wars game sold 8 million units in just a month and a half and 10 million units in four and a half months. "The expectations for this game are pretty significant as well," McKay said.
McKay also discussed the recent performance of GameStop. The company surprised investors by performing much better than expected in the last quarter, turning a profit.
"The challenge at GameStop is that there are two sides of the business that matter: you have the software side, but over time people tend to buy these games digitally, as opposed to going to the store and buying them," he said. "Game Stop obviously excels at getting people to buy software in-store, so there’s a significant long-term headwind coming from the software side."
"On the hardware side, Sony Group Corp.'s SONY PS5 has done really well in the last couple of quarters. Microsoft Corp MSFT and Nintendo have had more challenges. So, on the hardware side, you are kind of hanging your hat on the PS5 for the time being," he continued.
McKay assured the potential acquisition of Activision Blizzard by Microsoft could boost demand for Microsoft's hardware.
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When asked about Nintendo, McKay pointed out that the recent release of the Super Mario movie could drive more attention to Nintendo's content. However, the demand for the Nintendo Switch, which has been out since 2017, may be slowing down. There have been no announcements regarding price cuts, an updated version of the Switch or a successor. The upcoming release of the new The Legend of Zelda: Breath of the Wild in May is expected to be one of the biggest games of the year.
Moreover, Take Two's acquisition of mobile video game developer Zynga has raised investor questions about the mobile gaming market, which struggled last year. Take-Two does have a large pipeline of games and plans to release GTA VI, one of the most anticipated video games in years.
While questions remain about the company's guidance for the fiscal year ending March 2024, McKay believed Take Two is a compelling long-term play.
"Between the pipeline of games, the potential for mobile advancement, and how big this 'GTA VI' could be, it's a pretty compelling long-term play in our opinion, offset a bit by questions around what they’re gonna guide in about a month and a half."
And What About AppLovin, Playtika, Unity, SciPlay and Getty?
Regarding AppLovin Corp APP, McKay explained the company's advertising business is a particularly compelling aspect of its operations. He believed that when advertising returns to mobile games in a big way, Applovin and Unity Software Inc U will be in a good position to benefit. Unity's engine is used for game creation, and seven out of 10 games use it, giving the company a solid foothold in the mobile game business, although it is gradually pushing into more advanced forms of gaming.
"As the economy rebounds again, you should see your money flowing in advertising, and when the money flows in advertising it’s gonna be going towards games as a compelling growth opportunity within entertainment. Unity obviously should be in a good position to benefit from that flow," McKay said.
The expert also talked about Playtika Holding Corp PLTK, the Israel-based digital entertainment company specializing in the development and publication of mobile games.
"Playtika is almost all in-game spending, so it doesn’t have a sizeable advertising business at all. You really depend on their ability to continue to engage users within their games. It is among the best companies that we cover at extracting more money from their player base over time, so they have a good core of pretty big spenders on average," he explained.
With more disposable income to spend within these games as the economy rebounds, McKay said the company has a compelling growth opportunity.
SciPlay Corp.'s SCPL focus on social casino games makes them a superb operator within the space. McKay said its games will be harder for players to put down because of their nature. Nevertheless, he noted: "The thing that holds back SciPlay in terms of broader interest among investors is that it has a pretty low flow. Its parent company Light and Wonder own over 80% of the shares, so you tend not to see a high volume of shares every given day."
McKay addressed Getty Images Holding Inc GETY, the American-British visual media company and supplier of stock images, editorial photography, video and music. Getty owns a library of more than 477 million assets. The expert highlighted Getty covers major events such as The Olympics, the World Cup, and the U.S. elections. The company's revenue is affected by the cyclic nature of these events, with even-numbered years being more profitable than odd-numbered years.
"One of the reasons Getty's shares were down last month is they provided guidance for 2023 that kind of reflected that dichotomy between even and odd number years," he said. "But we’re hopeful that. in the long term, their collection of assets and services they provide to different consumers and business should position them for growth for the foreseeable future."
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