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Valuation and Upside Potential for EA, TTWO, and ATVI

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Gaming companies have been solid wealth creators in this decade. Stocks such as Electronic Arts (EA), Activision Blizzard (ATVI), and Take-Two Interactive (TTWO) have developed loyal player bases. The gaming companies have millions of daily active users and a strong portfolio of gaming franchises.

However, the overwhelming success of games such as Fortnite and PUBG has negatively impacted growth for gaming companies. Here, we’ll take a look at their valuation, average target price, key games, and more.

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Electronic Arts

Shares of EA rose 310% between September 2014 and July 2018. The stock then fell about 50% by the end of 2018 and has gained 27% year-to-date. EA shares have returned 186% in the last five years.

This $28 billion company holds successful franchises like FIFA, The Sims, and Madden NFL. EA’s Apex Legends game was launched in direct competition to Fortnite and other battle-royale genres.

Analysts expect EA to post revenue of $5.18 billion in fiscal 2020 (ending in March), a rise of 4.8% year-over-year. Its sales are expected to rise 6.6% to $5.52 billion in 2021 and 6.9% to $5.9 billion in 2022. EA’s revenue growth is accelerating.

Its earnings per share are estimated to rise 8% in 2020 and 10.2% in 2021. Comparatively, the stock is trading at a forward PE multiple of 19.8x, which makes it vulnerable in a choppy market.

ATVI  has surged since February 2019

Shares of Activision Blizzard (ATVI) rose 281% between September 2014 and October 2018. The stock then fell about 50% by the end of February 2019 and has gained 32% since then. ATVI is now up 20.5% year-to-date. Activision shares have returned 164% in the last five years.

ATVI has a market cap of $39.8 billion. ATVI has several billion-dollar franchises such as Call of Duty and Overwatch. It is also a leader in esports, as it has a first-mover advantage in this segment.

Analysts expect ATVI to post revenue of $6.34 billion in fiscal 2019, a fall of 12.7% year-over-year. Its sales are estimated to rise 9.8% to $6.96 billion in 2020 and 9% to $7.6 billion in 2021.

Its earnings per share are expected to fall 15.8% in 2019 and then rise 15.5% in 2020. Comparatively, the stock is trading at a forward PE multiple of 22.1x, which makes it expensive at the current price.

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Take-Two Interactive

Shares of Take-Two Interactive (TTWO) rose 500% between September 2014 and October 2018. The stock fell about 40% by the end of February 2019 and has gained 51% since then. TTWO is now up 24% year-to-date.

Take-Two shares have returned 450% in the last five years, and the company is valued at $14.6 billion. Its popular gaming franchises include Grand Theft Auto and Red Dead Redemption.

Analysts expect TTWO to post revenue of $2.78 billion in fiscal 2020 (ending in March), which would be a fall of 5.2% year-over-year. Its sales are expected to rise 0.9% to $2.8 billion in 2021 and 35% to $3.76 billion in 2022. The revenue spike in TTWO would be driven by the release of its next GTA installment.

TTWO’s earnings per share are estimated to fall 3.1% in 2020 and then rise 5.3% in 2021. Comparatively, the stock is trading at a forward PE multiple of 25.8x, which makes it overvalued at the current price.

Do you buy gaming stocks like ATVI at the current price?

Gaming stocks have made a strong comeback in the last six months. We were optimistic about Activision Blizzard and Take-Two Interactive when they were trading close to their 52-week lows. However, these companies are still growing at a slower rate compared to the overall gaming market.

While the esports vertical provides a platform for revenue growth, the segment is still in a nascent stage and accounts for less than 20% of the company’s sales. TTWO could experience some weakness in the near term but should be on investors’ radar before the next GTA game launches.

Driven by the growth in digital gaming, EA, ATVI, and TTWO increased their EPS by 14%, 25.8%, and 8%, respectively, in the last five years. Their earnings growth has been decelerating. How could these stocks react in the next 12 months? Let’s see what Wall Street thinks.

EA has a 12-month target price of $111.48, which is 12.4% above its current price. ATVI and TTWO have target prices of $55.21 and $135.92, respectively. While ATVI is trading marginally above its target estimate, TTWO is trading at a discount of 6.2% to estimates.

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