The COVID-19 pandemic, coinciding with a new generation of game consoles, has propelled the video game industry into a new stratosphere, and investors are about to see the results and the path to a sequel.
The pandemic has caused gamers to seek out new gear and games to pass the time spent sheltering in place, while more consumers with ample spare time have joined their ranks. Meanwhile, a new breed of gaming-related companies have entered the market with initial public offerings and direct listings.
In 2020, global video game sales jumped 25% to $191.12 billion, according to Lewis Ward, director of games research at IDC. These numbers include PC games, console hardware and software, and out-of-pocket spending on mobile games, while excluding in-game ad revenue and aftermarket game accessories. Highlighting the COVID-19 effect in this figure, Ward forecasts modest sales growth to reach $195.29 billion in 2021 and $195.8 billion in 2022.
Read more: Video games are a bigger industry than North American movies and sports combined, thanks to the pandemic
Activision Blizzard Inc.
ATVI,
-0.04%
will begin a parade of profits from video game companies this week, and analysts expect a strong performance in the industry in the last quarter, comparable to pre-pandemic results. From there, publishers will face increasingly difficult comparisons to previous quarters, as video games thrived under stay-at-home orders that began en masse in March 2020, and Microsoft Corp.
MSFT,
-0.13%
and Sony Corp.
SONY,
-0.79%
released long-awaited next-gen game consoles at the end of the year.
This puts the outlook for companies even more in check as investors search for clues whether COVID-19 was the main driver of earnings or whether the pandemic was just reigniting longer-term momentum for the sector.
Activision reports Tuesday and is generally a favorite with analysts given the breadth of the company’s reach in the myriad of today’s video game markets exemplified by the “Call of Duty” franchise. ‘Call of Duty’ not only serves the traditional console and PC market with ‘Black Ops – Cold War’ and ‘Modern Warfare’ titles, but the franchise offers a free-to-play ‘Warzone’ battle-royale option similar to Epic Games’ Fortnite,” with all of these options available on a mobile platform.
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Activision said it expects adjusted earnings of 84 cents per share on revenue of $2.02 billion for the first quarter. Analysts polled by FactSet expect adjusted earnings of 70 cents per share, given a broad interpretation of how Wall Street views the company’s quarterly results.
Additionally, analysts polled by FactSet estimate consensus bookings, rather than sales, which they place at around $1.8 billion for the quarter, based on Activision’s forecast of $1.75 billion. . The Street expects GAAP earnings of 67 cents per share, compared to the company’s outlook of 59 cents per share.
At the end of March, the company named Armin Zerza as chief financial officer, to succeed retiring Dennis Durkin, and said it planned to “exceed [its] prior Q1 outlook.” .
J.P. Morgan analyst Alexia Quadrani, who has an overweight rating on Activision, expects “higher and sustained engagement through Q1 for ‘Call of Duty’, with the game notably retaining its YTD share with “Fortnite”.
“Against the backdrop of more limited 2021 organic growth, we believe equity performance this year will be driven by execution across core franchises and investor enthusiasm for the new games pipeline – factors which, in our view, favor Activision the most because the company has significant long-term opportunities that we do not believe are fully reflected in current estimates,” Quadrani said of the industry as a whole.
Activision also publishes the “World of Warcraft” franchise under its Blizzard brand, as well as its “Overwatch” and “Diablo” franchises, and “Candy Crush” under its King brand.
MKM Partners analyst Eric Handler, who bought the stock, expects an earnings report from Activision.
“We continue to appreciate Activision’s approach to expanding its core franchises across more platforms, which should provide a solid avenue for growth over the coming years,” Handler said.
Jefferies analyst Alex Giaimo, who has a buy rating on Activision, said the biggest question on investors’ minds is “how to think about the financial trajectory of 2021 given the continued momentum in the video game space.
“What’s important to realize here is that much of ATVI’s strength has been driven by vastly improved internal execution, rather than lifting the shelter-at-home alone,” said said Giaimo. “From an industry perspective, there are still multiple tailwinds that should help keep momentum high through 2021 (and possibly much longer).”
The second of the big three American video game publishers to note is Electronic Arts Inc.
EA,
-0.63%
May 11. EA, known for sports games such as ‘FIFA 21’ and ‘Madden NFL 21’ as well as action titles like ‘Apex Legends’, has just completed its $2.4 billion acquisition of Glu Mobile Inc. , after completing its $1.2 billion acquisition of Codemasters Group Holdings PLC in February.
Analysts expect adjusted earnings of $1.05 per share on revenue of $1.39 billion, based on EA’s forecast of an unadjusted loss of about 7 cents per share , which includes a tax accounting charge of 52 cents per share, on revenue of $1.17 billion. .
MKM’s Handler, which has a Buy rating on EA, said the company’s acquisitions have already boosted expectations for 2022.
“We see EA as the most compelling name in our universe of video game coverage over the next 12 months,” Handler said, taking both acquisitions into account.
J.P Morgan’s Quadrani warned that social media activity – a metric closely watched by analysts to gauge player engagement – has slowed for ‘FIFA’, but that ‘Apex Legends’ is “continuing to perform well”. Quadrani has a neutral rating on EA.
Interactive software Take-Two Inc.
TWO,
-2.90%
The report is due May 18. The company is known for its “NBA2K” and “Borderlands” franchises as well as “Grand Theft Auto” and “Red Dead Redemption” under its Rockstar Games label.
After Take-Two ceded its bid for Codemasters to EA, it pledged to grow its 2K and Rockstar divisions as well as consider future acquisitions “very, very selectively.”
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