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Videogame stocks rose on Tuesday as an analyst said they were “recession-resistant.”
(TTWO) stock was recently up 1.7%, to $107.75, while
Activision Blizzard
(ATVI) was ahead 1.8%, to $43.14 and
Electronic Arts (EA)
was up 2.1%, to $93.24. The moves were largely in line with the S&P 500’s rise.
BMO Capital Markets analyst Gerrick Johnson upgraded Take-Two to Market Perform from Underperform, settling a $110 target price that is below FactSet’s $121 average.
The back story. Major videogame publisher stocks have been something of a mixed bag in 2019. EA is the only one currently ahead of the S&P 500, while Activision is down.
Investors have focused on the continued influence of Fortnite, a disruptive force that has hastened the spread of free-to-play models and raised questions about the sustainability of long-valuable franchises.
Read: Buy Take-Two Interactive Stock Because the Next Grand Theft Auto Is Coming
The current console cycle, meanwhile, is coming to a close and the shift to cloud-based gaming has begun. All told, investors have been forced to keep a close watch on publishers’ performance even as trends like the move toward digital distribution, which should provide a long-term boost to margins, tend to favor them.
What’s new. “The videogame industry is quite defensive,” Johnson wrote. “Interactive entertainment is one of the most inexpensive forms of entertainment as measured by cost divided by time consumed. Should an economic downturn take root, we would anticipate videogame consumption to grow as those who lose (or are fearful of losing) their jobs, may pull back on discretionary spending in other bigger ticket areas.”
That, of course, wouldn’t just benefit Take-Two. “We anticipate valuation multiples for videogame companies to move higher owing to the relative safety of the interactive entertainment industry,” he added. “While videogames may not be recession-proof, we do think they are recession-resistant.”
What’s next. There is another potential factor for videogame stocks: M&A. (Take-Two’s stock, it should be noted, moved recently on what appeared to be thin rumors of interest from
Sony
(SNE).)
“Videogame companies, including Take-Two, are being increasingly seen as potential acquisition targets by larger media, tech, and entertainment companies looking for exclusive videogame content and monetizable intellectual properties,” Johnson wrote.
Take-Two, owner of the Grand Theft Auto franchise, Red Dead Redemption 2, and a strong balance sheet, could be particularly interesting, according to Johnson. Possible suitors, he said, could include
Microsoft
(MSFT), Apple (AAPL), Sony, and Alphabet-owned (GOOGL) Google.
Email David Marino-Nachison at david.marino-nachison@barrons.com. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.
