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Which Video Game Stocks have More Upside?

TipRanks - Sun Jun 26, 8:18AM CDT

The video game market is growing at a staggering pace. As investors sour on video and music streaming firms, both of which are now worth less than the gaming market, big tech has been setting their sights on gaming, and it's not a mystery as to why.

Graphical capabilities are getting better with time, and many firms are looking to get into the metaverse. The metaverse will host a whole world of experiences beyond just gaming. However, the first big attraction is likely to be gaming experiences.

With the advent of video streaming, the barriers to getting in on next-generation gaming are poised to fall. With powerful system-of-a-chip (SoCs) that can power graphically-intensive games without draining a system's battery life, there's never been a better time to be a gamer.

Indeed, the next frontier of entertainment could lie in the gaming space, and many firms have taken notice. Over the past year, we've witnessed quite a bit of consolidation in the gaming space. Though the following video game firms may be compelling takeover targets, investors may have to suffer through a prolonged period of underperformance as the macro environment begins to fade.

Let's use TipRanks'?utm_source=theglobeandmail.com&utm_medium=referral Comparison Tool to evaluate three intriguing video-game stocks to see where Wall Street stands.

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Electronic Arts (EA)

Electronic Arts is an old-time gaming company that's fallen upon hard times. With meager sales, the latest iteration of its Battlefield franchise failed to impress. Indeed, competition in the shooter genre may be why the title was ultimately a flop. However, it may be a sign that gamers did not see anything revolutionary versus previous iterations in the series.

Indeed, themes and settings may differ, but it's clear that gamers want more if they're expected to pay full price for a title, as their discretionary budgets become challenged by inflation.

Apex Legends, the firm's three-year-old free-to-play battle royale shooter offering, was quite a success. As EA moves beyond iterating on older titles toward offering new, free-to-play titles with staying power, I think EA can make the moves to stage a comeback for its stock.

At writing, EA stock trades at 46.7 times trailing earnings, with a 0.6% dividend yield — not cheap. The $36 billion gaming giant looks like a terrific takeover target for any media or tech firm looking for an onramp into the metaverse.

Wall Street is bullish on the name, with the average EA price target of $150.80, implying 15.82% upside.

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Activision Blizzard (ATVI)

Activision Blizzard is a legendary video-game firm that Microsoft (MSFT) is looking to scoop up for $95 per share. Activision Blizzard faces numerous harassment lawsuits and has been the subject of intense backlash from employees. Microsoft, which has a growing gaming business, swooped in on the dip, marking one of the biggest takeover attempts in gaming history.

Only time will tell if regulars will give Microsoft the green light to acquire Activision Blizzard. Given that Activision so desperately needs a change of scenery (and management) amid its crisis, and the deal would likely benefit gamers (the inclusion of Activision Blizzard titles for free on Microsoft's Xbox Game Pass), the deal may ultimately go through despite its colossal size.

Further, the recent spill in the tech sector may cause anti-trust regulators to back off, improving Microsoft's odds.

For now, ATVI stock is hovering in the $76-78 range, a far cry away from the $95 per share that Microsoft will pay once the deal goes through. Warren Buffett was busy buying shares of ATVI in a merger arbitrage opportunity that could offer 24-26% upside from current levels.

Wall Street is bullish, with the average Activision Blizzard price target of $95.63, implying 22.7% upside.

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Take-Two Interactive (TTWO)

Take-Two Interactive is a $21 billion video-game holding company behind titles such as Grand Theft Auto and Red Dead Redemption, two cherished, big-budget franchises that engage audiences for years after their initial releases.

The company is working hard on the next iteration of the Grant Theft Auto series. However, given the complexities of such a triple-A title, it could be more than a year away. Arguably, Grand Theft Auto is the closest thing to a metaverse, making Take-Two an incredible addition for any behemoth seeking to get a foot in the door of the digital worlds of tomorrow.

Down nearly 40% from its peak, Take-Two stock has been a tough stock to hold. The company ended fiscal 2022 with a mixed bag of results, thanks partly to tough competition and a lack of big-budget titles beyond the NBA series. Until the next Grand Theft Auto launches, TTWO stock will likely be an uneventful mover.

The stock trades at 36.4 times trailing earnings and 5.9 times sales. With the $12.7 billion Zynga deal now closed, Take-Two now has a pretty robust mobile game portfolio.

Wall Street is bullish, with the average Take-Two Interactive price target of $179.70, implying 34.49% upside.

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Conclusion

Video-game stocks have been in a slump of late, but as consolidation activity continues, it's hard to imagine that they'll be held down for the long haul as their scarcity premiums climb with time. Of the three stocks, Wall Street seems most bullish on Take-Two.

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