Videogame Debate: Do Big Hits Still Matter? – Barron’s
Videogame stocks have soared in recent months, and over the weekend Barron’s had positive things to say about the industry’s continued momentum. One Wall Street analyst offered up a very different take Monday morning.
Cowen analyst Doug Creutz downgraded shares of Activision Blizzard, Take-Two Interactive Software, and Ubisoft Entertainment to Market Perform based on his belief that the stocks will lose steam once a big wave a new games hits stores in the next few months.
In-game spending has fundamentally changed the industry, giving publishers a steady revenue stream from more established titles, and boosting profits as well. But the flip side of the boom in recurring spending is that gamers are buying fewer new games. Creutz points to declines in full-game sales over the last five years.
“As games engage their audiences for longer periods of time (and generate more revenue thereby), consumers are becoming more selective about which games they play,” Creutz writes. “We expect the number of successful titles to continue to narrow over the next several years.”
That creates some “headline risk” for the stocks. Creutz notes that EA’s Titanfall 2 and Ubisoft’s Watchdogs 2 both underperformed sales expectations last winter, despite getting good reviews, which was likely the result of too much industry competition.
But, after a short-term dip then, the stocks have thrived. Our argument is that the game makers are finding ways to make do in that narrowed environment. They’re essentially getting more from less, as people spend up on in-game features.
The next question is how will the stocks react if more big games end up disappointing. The coming months include big releases from Activision (Call of Duty: WWII) and Take-Two (Red Dead Redemption 2).
Activision shares are down 3.3% Monday, while Take-Two shares have fallen 4.5%. Ubisoft’s stock, which trades in France, was up 0.2%.
Big Picture: An analyst worries that big new games will underperform sales expectations. Barron’s suggests that might not matter.