There’s No Metaverse Without Video Games: 2 Stock Picks By An Analyst From A $180 Billion Industry
The $180 billion video game industry offers a growth opportunity for investors according to a new report from an analyst offering two stock picks.
The video game analyst: Bernstein analyst Matti Littunen launched coverage for Take-Two Interactive Software, Inc. TWO with an overweight rating and a target price of $173.
Littunen also launched an overweight rating on Electronic Arts Inc. EA with a price target of $157.
The analyst’s takeaways: Bernstein has expanded his video game coverage by adding these two new names to his coverage list.
“We view the $180 billion video game industry as the best opportunity for structural growth in media, and rate both stocks as outperforming, considering them oversold relative to their quality and growth potential,” said Lithuanian.
Littunen said both of these companies grew up in an industry that didn’t.
“It’s poised to reap a decades-long demographic dividend, even in its most saturated markets, retaining pricing power due to its low product cost per hour of entertainment.”
The analyst sees metaverse growth and increased digital distribution as keys to growth for both companies.
“TTWO and EA look attractively priced relative to pre-Covid levels.”
The growth of the metaverse could benefit the entire video game industry, notes the analyst.
“There is no metaverse without video games: video game developers have been building metaverses since the 80s and have the opportunity to sell in a cross-platform arms race or expand their own direct footprint with consumers.”
Related Link: Zynga Acquired by Take-Two: What’s Next for the Mobile Gaming World
Electronic Arts: Littunen points to Electronic Arts’ strong gross margins and return on invested capital. The company also pays a quarterly dividend and derives 70% of its revenue from live services, Littunen noted.
“While the company’s major sports franchises may mature outside of mobile, we’re seeing growth in The Sims and sci-fi,” Littunen said.
The analyst believes Electronic Arts’ strong franchises are also valued by media companies looking to develop IP in shows and movies.
“EA and Take-Two both have strong AAA, character- and story-driven IPs that could work well in film and TV adaptations.”
Take two: Littunen highlighted Take-Two’s strong pipeline and mentioned that growing additional franchises and diversifying the company into mobile has made it less reliant on the Grand Theft Auto franchise.
“TTWO knows how to do the tricky double act of keeping gamers happy and making investors pay, with an uncompromising attitude towards creativity generating 50%+ ROIC,” Littunen said.
Littunen believes that the acquisition of Zynga Inc. ZNGA by Take-Two was “well-timed and structured”.
Take-Two has also stepped into the media space with a “Bioshock” adaptation in the works for Netflix Inc. NFLX.
“The company’s intellectual property has perhaps more potential for film and television adaptation than any other Western video game company,” Littunen noted.
Price action: As of Friday’s market close, shares of Electronic Arts were up 3.52% at $128.09 and have traded between $117.58 and $148.93 for the past 52 weeks.
Shares of Take-Two rose 3.71% to $136.41 and have traded between $131.37 and $195.82 for the past 52 weeks.