The Gaming Sector Is Setting New Records
Analysts at Evercore ISI initiated coverage on two gaming stocks highlighting a developing opportunity. The note to investors cites a rich pipeline of games and growing user engagement that is driving record sales this year. According to Evercore, the two you need to watch are Take-Two Interactive (NASDAQ:TTWO) and Activision Blizzard (NASDAQ:ATVI) but the entire gaming complex is on fire.
Data from NPD Group is more than encouraging. According to them, sales of games and gaming equipment topped $11.2 billion to set a new 3rd quarter record. Spending in the July-September period grew 24% on a YOY basis due in large part to the COVID-19 pandemic. This is down slightly from the $11.6 billion spent in the 2nd quarter but up from $10.9 billion in the first quarter and all are records.
On a segment basis, sales of game content (the largest segment by far) increased 24% across all devices with notable strength in mobile, subscriptions, and full-game downloads to PCS. Sales of hardware and peripherals, the consoles and extra-devices used to play the games, are up 16% and 35% for quarter and suggest strong game/subscription revenues for the coming quarter/year as well. Both Activision and Take-Two Interactive have two games in the top ten. For ATVI that means Call of Duty: Modern Warfare and Tony Hawk: Pro Skater. For Take-Two Interactive those are Minecraft and NBA 2K21.
Game Sales Are Accelerating In The 4th Quarter
And sales appear to be accelerating in the 4th quarter, an important factor to note with the release of two major gaming consoles due out next month. With that in mind, the industry is not only in the midst of a major expansion but on the cusp of a major upgrade cycle as well. When Nintendo launched its Switch Console in 2017 it became the fastest-selling console on record. The same performance is expected with the release of the Playstation 5 and Xbox Series, and all the games that will go with them.
Games sales rose 14% in October to $3.84 billion on a YOY basis. That’s down from the previous month’s $4.3 billion but October is usually one of the slowest months for game sales. On a year-to-date basis, sales are up 20% from 2019 and expected to remain strong through the end of the quarter. On a segment basis, sales of consoles increased 41% on a YOY basis and help ensure this year’s revenue gains will stick long past the release of new consoles.
Activision Blizzard Beats And Raises
Activision Blizzard reported a solid calendar 3rd quarter both beating the consensus for top and bottom-line results but also raising the full-year guidance. The company reports net-bookings are up 46% over the same time last year to outpace the broader gaming market. Bookings beat the consensus by 400+ basis points and were driven by both gains in new users and in-game spending. Looking forward, the company expects bookings to exceed $2.75 billion and drive EPS of $0.95. Both figures are above the consensus midpoints and likely low given the strength of the gaming market.
Take-Two Interactive Beats And Raises
Take-Two Interactive also reported a solid calendar 3rd quarter and gave a positive outlook for the 4th. The company says revenue grew 0.7% to beat the consensus by 800 basis points. More importantly, the company reports that its unrestricted cash-flow improved more than 1000% (that’s percent, not basis points) putting it in great shape for new acquisitions this year. The company just struck a deal to acquire the UK’s Codemasters that is expected to be accretive in the first quarter after closing. The deal is expected to close in the 1st quarter of 2021.
Looking forward, Take-Two Interactive is projecting 4th quarter revenue below the consensus mid-point but that doesn’t matter. The revenue guidance is probably too conservative and EPS will grow despite any perceived shortfalls.
"Our positive momentum continued in the fiscal second quarter with operating results that significantly exceeded our expectations,” said Chairman/CEO Strauss Zelnick. “Our terrific results were highlighted by the outperformance of NBA 2K, PGA TOUR 2K21, and the Mafia: Definitive Editions and Mafia: Trilogy."
