Video Game Industry Could Be in Flux This Christmas

Rockstar Games
"Grand Theft Auto V"

Stocks of the major game makers have soared with the launch of Xbox One and PlayStation 4, but analysts are skeptical about the momentum continuing.

With next-generation consoles PlayStation 4 and Xbox One having launched Nov. 15 and Nov. 22, respectively -- and just about selling out already -- 'tis the season for Wall Street analysts to weigh in on the video-game industry. Many who have over the past week or so see turbulence heading into Christmas, but also opportunity for patient investors.

“We expect a high level of volatility to continue this year,” BMO Capital Markets analyst Edward Williams told clients last week. “On a year-to-year basis, six of the seven interactive entertainment stocks that we monitor have outperformed the broader U.S. market. On a quarter-to-date basis, the ratio declines to one of seven.”

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One of the more bearish analysts -- at least in the near term -- is Doug Creutz at Cowen & Co., who cut his price targets two weeks ago on the three top video-game stocks: Activision Blizzard, Electronic Arts and Take-Two Interactive Software. He also downgraded the latter to a “market-perform” rating.

Creutz made his determination based in part on 2006-2007 data, when there was a similar major release of next-generation consoles. He argues that Activision Blizzard gained significant share back then while EA and THQ lost share, and that the changes have held ever since. Therefore, a lot is at stake this time around.

“We think 2014 contains the potential for similar changes in market share, but the winners and losers are very difficult to call right now,” he writes.

Despite the cuts in his price targets, Creutz writes that the pre-console trade has worked, with game stocks up 62 percent in the past 12 months compared to 38 percent for the S&P 500. He also writes that critical to becoming a “winner,” as opposed to a “loser,” in the current next-gen cycle are next year’s launches of Titanfall by EA, Destiny by Activision Blizzard and Watch Dogs by Ubisoft.

“Essentially, we believe that we are approaching an ‘event horizon’ for the group, beyond which fundamental performance for individual companies may diverge wildly from expectations in either direction,” Creutz writes.

He also notes that, while video-game stocks typically outperform for a year leading up to a next-gen console launch, they usually underperform for about six months post-launch.

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Despite big new titles like Grand Theft Auto V, Call of Duty: Ghosts and Battlefield 4, UBS analyst Brian Pitz wrote last week that consumers are spending less on games because they need to preserve money to pay for their Xbox One and PlayStation 4 consoles.

He tells clients that he likes Activision Blizzard stock over Take-Two stock, and that EA is the riskiest. He notes that EA is skimping on marketing for Battlefield 4 while Activision Blizzard has a massive campaign out for Call of Duty: Ghosts.

Drew Crum of Stifel, Nicolaus & Company Inc. apparently agrees, because a week ago he added Activision Blizzard to the Stifel Select List and made room for it by removing Walt Disney.

On Monday, Crum released a separate note where he analyzed video-game sales at in November. Activision Blizzard scored the top two spots, with Call of Duty: Ghosts for Xbox 360 at No. 1 and the same game for PlayStation 3 at No. 2. He also said Skylanders: SWAP Force was No. 12 while that game’s primary competition, Disney Infinity, was No. 24.

On Monday, shares of Activision Blizzard closed at $17.33, up 65 percent so far this year. Take-Two shares closed at $16.45, up 49 percent on the year thus far, and EA was at $21.90, up 51 percent.

THQ, which specializes in games based on TV franchises like Wheel of Fortune, SpongeBob SquarePants, Jeopardy! and others, has been fighting for survival for a few years and closed at 2 cents a share on Monday, down 93 percent so far this year.