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The Globe and Mail

U.S. videogame makers may trounce sales estimates again

A customer browses video games for sale at a GameStop Corp. store in West Hollywood, Calif., on Monday, Oct. 28, 2013.

Patrick T. Fallon/Bloomberg

Tepid holiday sales forecasts from two of the three major U.S. videogame producers have not dampened investors' confidence in one of the past decade's major stock market success stories for a simple reason: they almost always beat them.

In five bumper years, Activision Blizzard Inc, Electronic Arts Inc and Take-Two Interactive Software Inc have mushroomed in total market value from $14-billion in 2012 to almost $100-billion on Friday.

In that time, Reuters data shows they have exceeded their initial annual revenue expectations 87 per cent of the time and sector analysts think a strong slate of releases will see them do so again in 2018.

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"None of them do a good job at managing expectations. So they frequently guide below consensus," said Wedbush Securities analyst Michael Pachter.

"Their guidance will prove to be well below actual results."

Powered in part by the shift into gaming on mobile devices, research by PricewaterhouseCoopers management consultancy arm predicts gaming industry sales will grow an average of 8.2 per cent annually between 2017 and 2021.

That makes the market far faster-growing than any entertainment and media segment outside of video streaming businesses like Netflix, Amazon or Spotify.

Of the 15 annual sales estimates issued by the three firms since 2012, 13 have been below the final numbers. The majority of results have beaten expectations by at least 3-4 per cent while Take-Two on two occasions topped its own forecasts by more than 25 percent.

The gap in valuations to Netflix, however, is huge.

Share price-to-earnings ratio, a measure of how expensive a stock is for investors, stands at 23.7 times for Activision, 23.24 for Take Two and 21.30 times for EA, according to Thomson Reuters data.

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While those multiples compare solidly with Disney's 16.73 and Time Warner's 13.94, they are dwarfed by Netflix's 83.78 times.

That is some reflection of the streaming company's overwhelming public profile over the past two years, but also jars with the picture of two segments of the media world growing for similar reasons.

PricewaterhouseCoopers head of Global Advisory for Entertainment and Media, Christopher Vollmer, says the games sector has multiple sources of growth that should deliver a number of strong further years of expansion.

"Video gaming has become highly desirable entertainment for many consumers. It appeals to today's consumer that wants a high quality entertainment experience that is interactive, personalized and, increasingly social," he said.

Activision, which released the PC version of its smash hit Destiny 2, on Oct. 24, has already seen a strong launch for its popular Call of Duty: WWII, selling over 500 million copies in the first three days last month.

The lineup for 2018 is headlined by Take Two's Red Dead Redemption 2, Call of Duty: Black Ops 4, a new edition of EA's Battlefield as well as other top-tier titles.

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EA has said in the past that it expects Star Wars Battlefront II, which released last month, to replicate the success of the previous version that sold over 14 million units in the fiscal year 2016.

"The videogame industry is at a favorable point in its business cycle," Hilliard Lyons analyst wrote in a note dated Nov. 8. "Star Wars ... and other titles from EA's portfolio, position the company well for the coming holiday sales period."

Editor’s Note: An earlier version contained a wrong number on first-weekend sales for Call of Duty: WWII
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