The industry for videogames is on fire. According to a Newzoo report, the segment is expected to grow from $ 137.9 billion in 2018 to more than $ 180.1 billion by 2021. It appears to be a lucrative and potentially ever-growing market as gamers seem to be endlessly looking for new games desire. At first glance it shows no signs of delay.
But last week, investors got a glimpse of the kimono when game-studio's Electronic Arts (NASDAQ 🙂 (NASDAQ: EA) and Take-Two (NASDAQ 🙂 Interactive (NASDAQ: TTWO) reported. EA missed badly and rated EPS at just $ 0.86 per share on sales of $ 1.3 billion, compared to the expectations of $ 1.93 EPS on $ 1.8 billion in revenue. Take Two did better. It reported earnings per share of $ 3.89 on $ 1.2 billion in revenue, compared with consensus estimates of $ 2.72 and $ 1.5 billion, respectively.
ATVI, EA, TTWO vs SPX, 5-year performance
ATVI, EA, TTWO vs. SPX, 5-year performance
Nonetheless, the shares of both fell sharply, with 13% last Wednesday after the results were released. Note that they also drag the shares of Activision Blizzard (NASDAQ 🙂 (NASDAQ: ATVI). It lost 10% of the industry's concerns.
Activision reported Tuesday and beat earnings forecasts by one cent per share. The company also announced a $ 1.5 billion share buyback program, but added that it would reduce 800 jobs to pay more attention to game development. The news sent ATVI shares 3% higher in trading after closing time
But there is more to the story. In the past 12 months, shares of Activision, EA and Take Two lost 40%, 18% and 16% respectively, compared to the 4% gain over the same period.
ATVI, EA, TTWO vs SPX 1 year execution
ATVI, EA, TTWO versus SPX 1 year execution
Somewhat unexpectedly, the sale of established video studio studios has failed. And if that is not enough, additional potential headwinds for the industry have surfaced.
Segment Disruptor; microtransactions; Government regulations
The entire segment is disrupted by Fortnite, a free-to-play offer of private held Epic Games, of which Battle Royale surprised the market. It also earned a hefty profit of $ 3 billion in 2018 with 125 million registered players.
That is the most prominent current risk for this group of listed companies. Regulators of the government can also become a problem.
One of the revenue streams that gaming studios have successfully used to increase profits from existing games are microtransactions, in-game sales of random content that allow users to purchase additional improvements per game for Fiat currency. It is a lucrative and generally accepted practice: from EA's $ 1.28 billion in revenue made in 2018, $ 480 million, or 37% came from additional in-game purchases. It has even become the largest revenue segment in EA's profit and loss account. However, there is a surprise element attached to the standard microtransaction because buyers do not always know exactly what they will receive.
In April of last year, regulators in the Netherlands and Belgium have declared practice a criminal violation of their respective gambling laws. EA fought against the verdict, but lost. Similar gamble regulation for video games has not yet spread to other countries, but if this is the case, game studios & # 39; s probably a big problem.
Quality and originality
Perhaps a bigger challenge for the studio's is the endless player appetite for incessant innovation. All three game studios have popular line-ups, but many of the titles are new iterations of older games. Customers are busy with bored new versions of older titles.
For this reason, we believe that the Fortnite threat is only temporary. As soon as the cracking of Battle Royale ends – and that will happen – the publicly traded gaming studios, which have more experience on the market and a wider variety of titles, will be able to adapt better to the next big trend. In addition, all major studios now have their own version of Battle Royale games, so it is likely that the days of Fortnite have been counted. On Friday, EA reported that its own just released version of Battle Royale had won 10 million players in three days, catapulting 16% of the company's stock to close the trading week.
Bottom line
From a price perspective, EA shares are nominally the most expensive, trading for $ 102.33, compared to 89.25 for Take Two and $ 41.67 for Activision. From a P / E perspective, however, EA and Take Two are relatively inexpensive with a price / earnings ratio of 21 and 30, while Activision is at a much higher 50-somethings. Forward P / E ratios, based on estimates for the coming year, are 24 for EA, 20 for Take Two and 17 for Activision Blizzard. The average P / E ratio for the industry is 27, so EA and Take Two are relatively inexpensive growth games.
TTM revenues are the highest they have ever achieved for all three companies. Activision leads with $ 7.1 billion, EA is the next with $ 5.3 billion; Take Two came to $ 2.5 billion. For Net Net TTM, EA is now ahead with $ 1.4 billion, the highest ever, Activision is $ 577 million, after a 50% gain in the last two years, and Take Two is $ 367 million. , near high-level all-time.
Since Electronic Arts is the most established of the three gaming studios, with more games and deeper pockets, and the shares are the cheapest of the group after the recent decline, we recommend buying and securing investors. hold. for a good submission that would also like to make a name for a growing industry. Similarly, Take Two is a promising video studio studio with a reasonable rating, and we would also recommend them.
Although Activision shares are nominally the cheapest, are the most valued by the group, and they have also seen more severe declines last year. Although it is still a potentially good investment in a growing industry, it is not nearly as attractive as comparable products.
