Which video game actions have the most potential?
The video game market is growing at an astounding rate. As investors turn to video and music streaming companies, which are now worth less than the gaming market, big tech has set its sights on gaming, and it’s no mystery why.
Graphics capabilities are improving over time, and many companies are looking to jump into the metaverse. The metaverse will host a whole world of experiences beyond just gaming. However, the first big draw will likely be gaming experiences.
With the advent of video streaming, the barriers to accessing next-gen games are about to fall. With a powerful system of chips (SoC) capable of powering graphics-intensive games without draining a system’s battery life, there’s never been a better time to be a gamer.
Indeed, the next frontier of entertainment could be in the gaming space, and many companies have taken notice. Over the past year, we have witnessed some consolidation in the gaming space. While the following video game companies may make attractive takeover targets, investors may face an extended period of under- performance as the macroeconomic environment begins to fade.
Let’s use TipRanks’ comparison tool to evaluate three intriguing video game stocks to see where Wall Street stands.
Electronic Arts (EA)
Electronic Arts is an old-school game company that has fallen on hard times. With meager sales, the latest iteration of its Battlefield franchise failed to impress. Indeed, the competition in the shooter genre may be the reason the title was ultimately a flop. However, this may be a sign that players haven’t seen anything groundbreaking compared to previous iterations of the series.
Indeed, themes and settings may differ, but it’s clear that gamers want more if they’re expected to pay full price for a title, as their discretionary budgets are tested by inflation.
Apex Legends, the company’s three-year free-to-play battle royale shooter offering, has been a real hit. As EA goes beyond iterating on older titles to offering new free and sustainable titles, I believe EA can take the necessary steps to organize a return for its stock.
At the time of writing, EA shares are trading at 46.7x trailing earnings, with a dividend yield of 0.6% – not cheap. The $36 billion gaming giant looks like a formidable takeover target for any media or tech company looking for an on-ramp to the metaverse.
Wall Street is bullish on the name, with an EA average price target of $150.80, implying a 15.82% upside.
Activision Blizzard (ATVI)
Activision Blizzard is a legendary video game company that Microsoft (MSFT) is looking to pick up $95 per share. Activision Blizzard is facing numerous harassment lawsuits and has been the subject of strong backlash from employees. Microsoft, which has a growing gaming business, plunged lower, marking one of the biggest takeover bids in gaming history.
Only time will tell if the regulars will give Microsoft the green light to acquire Activision Blizzard. Given that Activision desperately needs a change of scenery (and management) amid its crisis, and the deal would likely benefit gamers (the free inclusion of Activision Blizzard titles on Microsoft’s Xbox Game Pass ), the deal could finally go through despite its colossal size.
Additionally, the recent leak in the tech sector could cause anti-trust regulators to back down, improving Microsoft’s chances.
At the moment, ATVI stock is hovering between $76 and $78, a far cry from the $95 a share Microsoft will pay once the deal closes. Warren Buffett was busy buying shares of ATVI in a merger arbitrage opportunity that could offer a 24-26% upside from current levels.
Wall Street is bullish, with an Activision Blizzard average price target of $95.63, implying a 22.7% upside.
Take-Two Interactive (TTWO)
Take-Two Interactive is a $21 billion video game holding company behind titles like Grand Theft Auto and Red Dead Redemption, two expensive, big-budget franchises that engage audiences for years after their first releases.
The company is hard at work on the next iteration of the Grant Theft Auto series. However, given the complexity of such a triple-A title, it could take more than a year. Arguably, Grand Theft Auto is the closest thing to a metaverse, making Take-Two an incredible addition for any juggernaut looking to set foot in the doorway of tomorrow’s digital worlds.
Down nearly 40% from its peak, Take-Two stock has been hard to hold. The company ended fiscal 2022 with mixed results, thanks in part to stiff competition and a lack of big-budget titles beyond the NBA series. Until Grand Theft Auto’s next launch, stock TTWO will likely be an uneventful move.
The stock is trading at 36.4 times earnings and 5.9 times sales. With the closing of the $12.7 billion deal with Zynga, Take-Two now has a pretty strong mobile games portfolio.
Wall Street is bullish, with a Take-Two Interactive average price target of $179.70, implying a 34.49% upside.
Video game stocks have been on a slump lately, but as the consolidation activity continues, it’s hard to imagine they’ll be sustained for the long haul as their scarcity premiums increase over time. Of the three stocks, Wall Street looks the most bullish on Take-Two.
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