3 Video Game Stocks to Buy for Year-End Strength

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It’s a great time to be a video game maker and a great time to buy video game stocks.

Google Nexus Player, Android Play games

Video game stocks are getting a big boost from multiple, powerful catalysts. As a result, shares of Activision Blizzard (ATVI), Electronic Arts (EA), and Take Two Interactive (TTWO) look attractive after they retreated in recent weeks, along with the rest of the market.

Digital video games, which carry higher margins than traditional discs, are becoming much more popular. Consequently, video game makers’ margin outlook has improved, making video game stocks better buys than in the past.

Even better, the huge Chinese video game market has been rebounding ever since the country’s government decided to end a 14-year ban on the sale of video game consoles last year.

Finally, in coming months, Activision, Electronic Arts and Take Two are all set to release multiple games that should dominate holiday season sales, particularly with sequels from hit franchises.

Given all of these catalysts, video game stocks are definitely attractive at current levels. But let’s take a closer look at each name to see why these stocks are worth your attention.

Video Game Stocks to Buy: Activision Blizzard (ATVI)

video-game-stocks-atviActivision Blizzard (ATVI) reported that its monthly active user base surged a blistering 35% year-over-year last quarter. The company’s operating margin rose to 22.8% from 17.2%, as its revenue from its high-margin digital channels increased 27% year-over-year to a record $611 million.

The company said that its revenue and monthly average user metrics reached records in China last quarter, driven by the popularity of several of its games.

“We are positioned for growth in new geographies, and in particular in large and fast-growing China,” the company stated on its second-quarter conference call.

In coming months, Activision plans to release three new games that should be very popular. It said that it would unveil Skylanders SuperChargers, the newest title in its Skylanders  franchise, on Sept. 20. According to the company, Skylanders has been the most popular console video game franchise this year. On Oct. 20, it plans to launch Guitar Hero TV, the newest installment of its highly popular franchise, Guitar Hero, which has appealed to gamers of all genders. And on November 6, the company is supposed to release its latest Call of Duty game, Call of Duty: Black Ops III.

In fact, the strength of ATVI stock has landed it in the S&P 500 index.

Video Game Stocks to Buy: Take Two Interactive (TTWO)

take-two-interactive-ttwo-stock-logo-185Take Two Interactive’s (TTWOfirst-quarter results missed expectations by a wide margin, as it reported adjusted first-quarter earnings of 31 cents per share, versus the consensus outlook of 36 cents. True, the company reported revenue of $366 million, beating the consensus outlook of $351 million. But its full-year EPS guidance of 75 cents to $1 fell short of the consensus outlook of $1.08.

Still, Take Two’s valuation is attractive, as it’s trading at just 17 times analysts’ consensus 2016 EPS estimate of $1.70. And analysts expect the company’s EPS to jump to $1.70 from just $1.02 this year, indicating that they believe the company has significant growth engines.

Indeed, Take Two does have significant positive catalysts in the pipeline. Although TTWO stock missed expectations last quarter, revenue did jump 142% versus the same period a year earlier. The company’s top line result also exceeded its guidance of $325 million to $350 million. Meanwhile, its high-margin digital revenue jumped 139% to $254 million.

Take Two’s gross margin came in at a hefty 46% last quarter, which was actually down versus the same period a year earlier. However, the video game maker said that it expects its gross margins to rise to the upper 40s during the current quarter. Moreover, it said that it expects its margins to continue to expand as its digital revenues increase further, and it indicated that it would look to return more cash to shareholders.

Moreover, Take-Two’s NBA 2K Online game has been a big hit in China, as it has 27 million registered users and is the most popular online PC sports title in the country, according to the company. Upcoming titles like NBA 2K16 and WWE 2K16 should find similar success.

Video Game Stocks to Buy: Electronic Arts (EA)

Electronic Arts ERTSElectronic Arts (EA) reported stronger-than-expected fiscal first-quarter 2016 earnings results in July, raising its full-year guidance as its high-margin digital business continues to grow.

Earnings beat expectations by a wide margin, with profits of 15 cents versus the Street’s outlook of 3 cents. Adjusted revenue came in at $693 million, easily surpassing the consensus outlook of $653 million.

For the full year, Electronic Arts increased its EPS guidance to $2.85 from $2.75 and raised its revenue outlook to $4.45 billion from $4.4 billion. Both its top- and bottom-line guidance were roughly in line with analysts’ consensus estimates.

EA generated 77% of its revenue from its digital business last quarter, up from 67% last quarter and just 37% a year ago. The company’s digital revenue increased 10% versus the same period a year earlier to $532 million.

Most important for Electronic Arts, however, is its upcoming Star Wars Battlefront game, which is due out on November 17.

The game has gotten rave reviews from many websites, including an exuberant review from Stuff, and Wall Street research firms Piper Jaffray and Jefferies expect it to dominate sales charts.

Sales of the game should set records, as the hype surrounding the December release of Star Wars: Episode VII — The Force Awakens should cause the video game to fly off shelves.

As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.

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Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/video-game-stocks-ea-atvi-ttwo/.

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