EA, ATVI, and TTWO have doubled their returns since 2014
The leading gaming companies in the US include EA, Activision Blizzard, and Take-Two Interactive (TTWO). While EA is valued at $29 billion in terms of market cap, ATVI and TTWO have market caps of $41.2 billion and $13.6 billion, respectively.
These billion-dollar giants generated significant returns before the market sell-off impacted their shares in the last quarter of 2018. Between December 2014 and July 2018, EA was up 215%. It then lost close to 50% in market value by the end of 2018. In the last five years, EA stock has risen 132%.
Activision Blizzard stock gained almost 300% between December 2014 and October 2018. It then lost over 41% between October 2018 and March 2019 before wiping out part of these losses in the last few months. ATVI has risen 156% in the last five years.
Another gaming stock that has crushed market returns is Take-Two Interactive. TTWO gained almost 400% between December 2014 and October 2018. It then fell 37% by the end of February 2019. In the last five years, TTWO has returned 350%.
This means if you’d invested $10,000 in EA five years ago, it would be worth $23,200 today. This number stands at $25,500 and $44,900 for ATVI and TTWO, respectively. But as we’re aware, past returns don’t matter.
Though EA, TTWO, and ATVI are billion-dollar giants, the gaming space is highly disruptive and has attracted multiple competitors.
A look at EA’s, TTWO’s, and ATVI’s growth metrics
Electronic Arts is set to return to revenue growth after a sales decline in fiscal 2019 (which ended in March). EA’s sales fell 4.6% to $4.94 billion in fiscal 2019. Analysts expect its revenue to rise 4.7% to $5.17 billion in fiscal 2020, 3.2% to $5.34 billion in fiscal 2021, and 9.9% to $5.87 billion in fiscal 2022.
In comparison, EA’s earnings are expected to grow 10.1% in 2020, 8.2% in 2021, and at an annual rate of 8.2% in the next five years. In the last five years, EA’s earnings were up 9.3% annually.
Activision Blizzard’s sales are expected to fall 12.3% to $6.36 billion in 2019. Analysts expect its sales to rise 8.8% to $6.92 billion in 2020 and 8% to $7.48 billion in 2021.
In comparison, its adjusted earnings are expected to fall 15% in 2019. They’re then expected to rise 13.1% in 2020 and at an annual rate of 4.9% over the next five years. In the last five years, ATVI has increased its earnings at an annual rate of 12%.
TTWO will likely see a revenue decline in the next two years. Analysts expect the company’s sales to fall 2.4% to $2.86 billion in 2020 and 1.2% to $2.82 billion in 2021. Analysts expect its revenue to rise 31% to $3.7 billion in 2021.
In comparison, TTWO’s earnings are expected to rise 0.8% in 2020, 2.5% in 2021, and at an annual rate of 12.8% in the next five years. In the last five years, TTWO’s earnings have risen 10.7% annually.
What will drive gaming companies’ revenues?
We’ve seen the revenue and earnings growth metrics for EA, TTWO, and ATVI. But what will drive sales higher for these companies? Gaming heavyweights bank on the popularity of billion-dollar franchises for revenue growth.
Just as in the case of movie production, not every game launched is a fan favorite. EA has several successful franchises, such as FIFA, NBA, Star Wars, and The Sims. Similarly, ATVI has games such as Call of Duty and the hugely popular Candy Crush in its portfolio.
In comparison, TTWO banks on games such as Red Dead Redemption and Grand Theft Auto for revenue growth. These companies are set to benefit from global growth in the gaming space.
The shift to mobile gaming in the last few years has resulted in strong bottom line growth for EA and its peers. The mobile gaming market could touch $96.4 billion by 2022, according to Newzoo estimates, and could continue to drive profit margins higher.
In addition to traditional gaming, companies are also heavily investing in esports. The esports vertical is already valued at $1 billion and could rival traditional sports in terms of viewership and prize money by the end of the next decade.
The growth story remains intact for EA and its peers
It’s clear that global gaming growth will continue to drive sales for EA, ATVI, and TTWO. The launch of next-gen consoles next year will also be a key driver of their top line growth. But these same gaming stocks will be severely affected in a market sell-off if recession fears come true in 2020.
Currently, analysts remain bullish on these companies. They have an average target price of $137.3 for TTWO, which is 14% above its current trading price. The average target price for ATVI is $60, indicating a potential upside of 11.4%.
Analysts expect EA stock to reach $110 by the end of 2020, 10% higher than its current trading price.