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Activision Blizzard’s Call of Duty game.
Courtesy of Activision
As governments begin to encourage social distancing to slow the spread of novel coronavirus, the videogame industry could see some near-term benefits. Plus, such stocks double as recession-resistant, if the virus were to spark an economic downturn, according to Cowen analyst Doug Creutz.
“While all stocks are getting caught in the current downdraft, some companies are going to see less impact to fundamentals than others,” he wrote. “We believe that the video game sector rather uniquely is poised to see very little disruption to results over the next 12 months in all but the most severe (read: the stock market will be the least of our problems) scenarios. As such, we view the sector as a logical place to favor in the current volatile market environment.”
Creutz’s top picks, in order, are
Zynga
(ticker: ZNGA),
Electronic Arts
(EA),
Glu Mobile
(GLUU), and
Take-Two Interactive Software
(TTWO). He has market perform ratings for both
Activision Blizzard
(ATVI) and
Ubisoft Entertainment
(UBI).
As Creutz noted, videogames could see increased engagement as folks fight off cabin fever. Online gaming often includes voice chat, a way friends can keep in touch and hang out virtually amid self-quarantines. Creutz cited, anecdotally, increased network data from
Telecom Italia,
suggesting such increased online use in Italy. Plus, as Americans avoid vacations, dining out and attending events, they will have more money to spend on videogames and their digital add-ons.
In terms of developing the games, he noted that some studios have begun enforcing work-from-home policies, and they haven’t cited serious near-term delays. He does expect some lost productivity, but still thinks game developers will fare well compared with other entertainment sectors such as television and film—where studios have shut down production in some cases.
Videogame stocks all fared better than S&P 500 index on Monday, as it fell 12%. Creutz pointed out that the sector’s fundamentals held up in the recessions of 2001 and 2008-09. U.S. industry software sales grew more than 9% year over year in 2001, by 24% in 2008, and declined only 9% year over year in 2009.
“It’s also worth noting that the video game companies generally have cash-rich balance sheets, with little or no debt,” he wrote. “As such, if a recession does put strains upon the financial system, the sector isn’t in a position where it could face liquidity issues”
If the coronavirus outbreak does lead to a recession, Creutz thinks earnings estimates would see only modest pressure. For now, he is maintaining his earnings estimates for the companies he covers.
In December, Barron’s picked Activision Blizzard as a great way to play a new wave of gaming consoles. Shares of game publishers such as Activision have historically outpaced the market ahead of a new console release. The company began offering a free-to-play Call of Duty game last week that has been hugely popular, amassing 15 million players in just three days.
Write to Connor Smith at connor.smith@barrons.com
