Piper Jaffray Reaffirms Love For Video Game Industry As Software Sales Rise 7%

Piper Jaffray analysts Michael J. Olson and Yung Kim believe that GameStop Corp. GME is "well positioned to benefit from a renewed growth period within the console video game industry," driven by the combined sales of PlayStation 4 (20.2 million units) and Xbox One (somewhere in the 10 million range).

GameStop (which has a $51 price target and Overweight rating) relies on the rest of the industry, however. Citing data from NPD, Piper Jaffray said that overall software sales increased 7 percent in February. Take-Two Interactive Software, Inc. TTWO enjoyed the healthiest growth in this category.

"Take-Two's NPD sales were up 72% y/y for February, driven by the launch of incremental new IP Evolve (2/10)," the analysts, which have an Overweight rating and $35 PT, wrote in a research note. "The title received 77 and 75 metacritic scores for PS4 and Xbox One, respectively, and NPD sales are lower than we anticipated in light of our estimate for sales of 3.5M units for the quarter."

While "Evolve" may not have performed as well as they expected, the analysts said that the 18-month-old "Grand Theft Auto V" continued to build on its sell-in of more than 45 million units. Piper Jaffray expects console software revenue to increase 87 percent year-over-year in the March quarter.

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Answering The 'Call of Duty'

February software sales were also positive for Activision Blizzard, Inc. ATVI.

"Activision Feb. NPD revenue increased 16% y/y, driven by incremental Destiny and a modest uptick for Call of Duty: Advanced Warfare vs. prior iteration Ghosts, offsetting continued decline for Skylanders: Trap Team vs. prior iteration Swap Force," Piper Jaffray wrote.

Activision has a $26 PT and an Overweight rating.

"We are modeling for Activision segment revenue to decline -7% y/y in Q1'15, due in part to FX headwinds. Activision's Q1'15 guidance calls for a -17% y/y decline in overall company revenue, due to a tough comparison with the launch of a Diablo III expansion the prior year," Piper Jaffray added.

Not Everyone Was A Winner

Piper Jaffray remained somewhat optimistic about Electronic Arts Inc. EA despite software sales declines of 32 percent in February.

"EA's March quarter guidance calls for a -9% y/y decline in overall company revenue; the guidance includes the 3/17 launch of Battlefield: Hardline, the timing of which will only allow for initial sell-in to be captured in the March quarter," Piper Jaffray, which has an Overweight rating and $55 PT, wrote. "For the first two months of EA's March quarter, NPD sales are down 32%. However, we note that the company continues to generate significant digital revenue, driven in large part from Ultimate Team modes for EA Sports titles, not accounted for in NPD data."

For the March quarter, Piper Jaffray modeled a 10 percent year-over-year decline in the publishing segment.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.