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Top Analyst Raises Price Targets on Sizzling Gaming Software Stocks Before Earnings

24/7 Wall St. logo 24/7 Wall St. 10/26/2020 Lee Jackson

a young boy wearing a bow tie © Provided by 24/7 Wall St. This year has truly been one for the record books, and one many of us can’t wait to see in the rear-view mirror. One of the central changes the pandemic brought to all of us was the shutdown of schools and businesses, and the inevitable herding of all of us to our homes to live and work full time.

While it was difficult, there were sectors and industries that saw a huge tailwind from the shutdown. Everything from video/teleconferencing and consumer staples to the increase of online and console gaming. The three leading companies in the software gaming industry look poised to deliver the goods when they report third-quarter results.

A new research report from the gaming team at Stifel raises estimates and price targets on three companies that continue to dominate the gaming arena, and all look like solid ideas for more aggressive growth investors looking for an event-driven potential earnings alpha play.

While all these top stocks are rated Buy at Stifel, it’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Activision Blizzard

This remains a top gaming pick on Wall Street, and Stifel is very positive on it. Activision Blizzard Inc. (NASDAQ: ATVI) develops and publishes online, personal computer (PC), video game console, handheld, mobile and tablet games worldwide.

The company develops and publishes interactive entertainment software products through retail channels or digital downloads and downloadable content to a range of gamers. Its legacy franchise Call of Duty continues to be hugely popular.

The analyst's report said this about the stellar third-quarter earnings potential:

Activision Blizzard is scheduled to report third results on October 29th. Based on healthy engagement metrics across the industry (better relative to our previous assumptions), contributions from the Call of Duty franchise, and out-performance for recently released Tony Hawk Pro Skater 1 + 2, we've increased estimates. And with expectations for positive fundamental momentum through the balance of 2020 into next year, a perceived beneficiary of the upcoming console transition, and a strong Blizzard pipeline. Our estimates include non-GAAP EPS of $0.67 (vs. $0.32) on net bookings of $1.728 billion (+42%), in line/ahead of consensus (and above guidance). We think a beat is likely, largely due to the Call of Duty franchise.

Investors receive just a 0.51% dividend. The Stifel price target was lifted from $97 to $102. The Wall Street consensus target is $92.53, and the last Activision Blizzard stock trade on Friday was reported at $81.04.

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Electronic Arts

This is a leading video game developer that should benefit from not only the continuing rise in new console sales, but the rising trend of mobile gaming. Electronic Arts Inc. (NASDAQ: EA) produces top-selling games and related content and services under the EA brand in various categories, including action-adventure, role-playing, racing and first-person shooter games.

The company is realizing a greater percentage of revenues from digital platforms, which may enhance margins and lead to more sustainable revenue growth. Key franchises for the company include Madden, FIFA, Need for Speed, Battlefield, Star Wars Battlefront, Mass Effect, Dragon's Age and The Sims.

Stifel is very positive on Electronic Arts' future:

Electronic Arts is scheduled to report fiscal second quarter results on November 5th. In summary, we are anticipating a beat-and-raise quarter, based on healthy industry fundamentals, a solid launch for Madden NFL 21 + Live Services growth, but also guidance which we view as too conservative (even from the time it was originally issued). Accordingly, we've made modest upward revisions to estimates. And at less than 20 times forward non-GAAP earnings (among the cheapest console publishers), we continue to rate the shares Buy. We've increased our second quarter fiscal estimates and now forecast non-GAAP EPS of $0.10 (vs. a - $0.03 loss previously), on net bookings of $1.002 billion (-24%; vs. $941 million previously), which positions us above consensus and management's outlook which is a -$0.15 loss.

Stifel raised the $161 price target to $163, which compares to the consensus target of $120. Electronic Arts stock ended last week at $126.67 a share.

Take-Two Interactive Software

This top video game producer also has cashed in with some super-hot titles. Take-Two Interactive Software Inc. (NASDAQ: TTWO) develops, publishes and markets interactive entertainment solutions for consumers worldwide. The company offers its products under the Rockstar Games and 2K labels, as well as under Private Division and Social Point labels.

Take-Two develops and publishes action/adventure products under the Grand Theft Auto, Max Payne, Midnight Club, and Red Dead Redemption names through developing sequels, and it offers downloadable episodes, content and virtual currency, as well as releasing titles for smartphones and tablets. The company also develops brands in other genres, including the LA Noire, Bully and Manhunt franchises.

In addition, the company publishes various entertainment properties across various platforms and a range of genres, such as shooter, action, role-playing, strategy, sports and family/casual entertainment under the BioShock, Mafia, Sid Meier's Civilization, XCOM series and Borderlands labels. It publishes sports simulation titles, comprising NBA 2K series, a basketball video game; the WWE 2K professional wrestling series; and the Golf Club. Additionally, the company offers free-to-play mobile games, such as Dragon City and Monster Legends.

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The stock has been on fire, but the analysts remain very positive:

Take-Two is scheduled to announce its fiscal year second quarter on November 5th. We think a beat and raise quarter is likely, and thus are increasing estimates ahead of this announcement to reflect gains across key franchises including NBA 2K and Grand Theft Auto. And with expectations for positive fundamental momentum into the [second] half a perceived beneficiary of the upcoming console transition, and a "large and diverse" development pipeline. Our fiscal second quarter estimates have been increased and include non-GAAP EPS of $1.59 (vs. $1.39 previously) on net bookings of $870 million (vs. $823 million previously), positioning us near consensus and above guidance.

The Stifel price target of $190 is now $193, which is above the consensus target of $186.62. Take-Two Interactive stock closed on Friday at $164.43 per share.

Buying shares in front of earnings always comes with some inherent risk, but given the strong roll the stocks have been on, and the incredible strength of the gaming space this year, aggressive investors at the minimum can buy partial positions here. With the holiday shopping season also upon us, the sector strength has a pretty solid tailwind that could easily carry into 2021.

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