Two of the largest video game publishers – Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) – are down over the last two years. Scorched by the rise of artisanal “indie” developers, they continue to lose substantial market share to smaller game studios.
It’s reflective of a change among “gamers,” who increasingly prefer scaled-down video games that suit their niche tastes. Beer drinkers went through the same metamorphosis with the advent of the craft beer industry, which severely altered how the macro-brewers (like Anheuser-Busch) did business.
For the video games industry, it’s a retro shift. Back in the day, before mega-publishers took over, self-publishing game developers dominated the PC gaming market. Blizzard, one half of Activision Blizzard, was one of those companies.
The release of their landmark game Starcraft in 1998 (one of many Blizzard titles to receive critical acclaim) earmarked Blizzard as a serious up and comer. 10 years later, Vivendi Games – the parent company of Blizzard – merged with games publisher Activision, officially sending the Blizzard brand public under the symbol ATVI.
Since then, the stock has done very well. EA enjoyed equally impressive gains, too, until 2018 hit. Neither publisher could keep up with the industry’s new challenges and are now attempting to regroup. They’re both up on the year – ATVI 25%, EA 34% – and if history repeats itself, we could see even bigger returns moving forward.
And it’s all because of one key event that’s almost here:
The release of “next-gen” consoles.
Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) are on schedule to debut their new video game systems during the holiday season next year.
The last generation of consoles – which includes Microsoft’s Xbox One and Sony’s PS4 – came out in late 2013. The 12 months before that, both EA and ATVI shares soared.
And if this year’s gains are any indication, it looks like it’s about to happen again. Analyst Matthew Thornton, of SunTrust Robinson Humphrey, issued a Buy rating on the stocks for that reason.
He specifically pointed out Activision’s strong performance from recent releases like World of Warcraft Classic, Call of Duty Mobile, and Call of Duty Modern Warfare – all titles that represent the company’s strongest brands.
Moreover, Thornton expects record-breaking sales from several titles still in development, including Diablo Immortal, Overwatch 2, Diablo 3, and a yet to be named Call of Duty game. All of which are sequels to existing IPs with legions of fans.
EA, on the other hand, doesn’t boast as impressive of a library. But Thornton still sees promise in the publisher’s core sports franchises, like FIFA, Madden, and NHL, which could see a huge lift with the release of “next-gen” consoles.
As it stands, roughly 70% of EA’s revenue comes from console titles, meaning that investors are likely to price-in next year’s console-driven gains ahead of time. Even if ATVI and EA drop after the new consoles hit the market, the 12-month period beforehand could be highly profitable for bulls.
Better yet, gaming stocks have a tendency to perform better from early spring through the summer. With the fall/winter hangover coming to an end, there might not be a better time to buy EA and ATVI.
So long as the trade war doesn’t heat up again, as both companies have made attempts to penetrate the Chinese market.
