The video game industry has not been treated kindly by the stock market recently. Despite the sector’s impressive unit sales, shares of Activision Blizzard (NASDAQ:ATVI), Take-Two Interactive (NASDAQ:TTWO) and Electronic Arts (NASDAQ:EA) have been hammered in recent months.
As a result, long-term investors are examining the damaged stocks, wondering if any of them are attractive. The largest name in the sector is Activision stock, so many investors are looking closely at it.
But is Activision stock the best video game maker to buy? It’s debatable.
First though, why are video game stocks under pressure? Recent data suggests that video games have been selling well this year.
But that hasn’t been reflected in the stocks. Is the video game crackdown by China to blame? How about the slowdown of gaming chip revenue reported by Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD)? Is Fortnite, a free online video game, eating into game-makers’ sales?
Those situations aren’t helping, but it’s hard to blame them solely for the massive underperformance.
A Closer Look at Activision Stock
It took 20 months for Activision stock to go from $45 to $84. It took two months to undo the entire rally, as ATVI stock tumbled about 40% in the last eight weeks. Investors who have been long Activision stock are surely frustrated with its performance, while other investors may be wondering if now is the time to buy Activision stock.
Last month, ATVI reported fourth-quarter earnings per share that beat expectations by 2 cents. The company’s top line, which met expectations, fell 12.6% year-over-year, and its Q4 bookings guidance missed the consensus outlook. ATVI stock was subsequently pummeled, as the shares are down over 20% since the Q4 results were reported on Nov. 8.
There are concerns about two of Activision’s larger franchises: Destiny and Call of Duty. Although Call of Duty is doing well, ATVI has tough comps from 2017, when it released a World War II version of the game. We shouldn’t ignore these situations, but down near current levels, they seem baked into Activision stock price.
ATVI stock trades at 18 times this year’s consensus earnings outlook, which calls for growth of more than 14% YoY. In 2019, the consensus outlook calls for another 7% increase in the company’s profits. Analysts on average expect ATVI’s top line to rise 4.3% this year and 2.8% in 2019.
Although ATVI’s growth outlook may not be robust, Activision stock isn’t very expensive, considering that it’s a premiere video game maker and the video game sector is expected to continuously grow going forward.
ATVI vs. TTWO
But is Activision stock the best name in the sector to buy? The other major name in the space is TTWO stock. Trading at 21 times this year’s consensus earnings estimate, TTWO stock is slightly more expensive than Activision stock. However, TTWO’s earnings and revenue are expected to jump by almost 50% this year. Most of its growth is being fueled by its recent release of Red Dead Redemption II. So far, sales of the game seem to be exploding.
Since TTWO’s Grand Theft Auto V remains one of the top-selling video games in the industry, while the company recently released a new NBA game, and it has momentum in eSports, I feel particularly bullish about TTWO. Investors should be careful not to underestimate the potential of its Red Dead Redemption game.
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After taking a painful beating, ATVI is holding up near its 200-week moving average and its February 2017 breakout point.
With that said, where can ATVI stock go from here? Activision stock is deeply oversold, as its 10-week moving average is about $10 per share (or ~20%) above its current prices. I expect this moving average to be resistance at first, although it’s not yet clear whether it will drop down to ATVI’s current stock price or if Activision stock price will climb to it.
If Activision stock rallies, look to see how it does near $55, a level that I believe could also act as resistance. On the downside, if current support gives way, look to see how the $44 -$45 level holds up. If ATVI stock falls below that level, a decline to $40 is in the cards.
So what’s the bottom line here? After a brutal decline, ATVI stock has become more attractive for long-term investors. I prefer TTWO stock at this exact moment, but I like both ATVI and TTWO more than EA.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long NVDA and TTWO.
