Video Game Stocks Could Test Bull Market Highs

Video game software companies have shaken off pandemic selling pressure and are trading relatively close to bull market highs posted in 2018, with stay-at-home orders around the world giving the gaming industry a much-needed boost. The scheduled introduction of a new generation of gaming consoles in the fourth quarter has underpinned this uptick as well, adding to buying pressure after a long period of apathy.

The NPD research firm reported that spending on video game hardware, software, accessories, and cards rose an impressive 35% year over year in March 2020 to $1.6 billion. This contrasts with January and February declines of 26% and 29%, respectively, highlighting the positive impact of home-bound workers with plenty of time on their hands. Even consoles saw a huge jump in sales even though current versions are nearing end-of-life.

Some doubts were raised about console release dates in the first quarter, with the pandemic putting a lid on software developer conferences and trade shows that are needed to ensure a deep catalog of new games. However, Microsoft Corporation (MSFT) and Sony Corporation (SNE) have held their ground, promoting launches for the XBox Series X and PlayStation 5 in November or December, just in time for the 2020 holiday season.

Chart showing the share price performance of Activision Blizzard, Inc. (ATVI)

Activision Blizzard, Inc. (ATVI) beat first quarter 2020 estimates in a May 5 earnings release, guiding both second quarter and fiscal year 2020 metrics above consensus. The stock broke out above 2008 resistance at $19.28 in 2014 and entered a strong uptrend that posted an all-time high at $84.68 in October 2018, ahead of a steep slide to a two-year low just above $40. It has been trading within that range for the past 14 months, gaining ground in a complex recovery wave.  

The uptick has now reached resistance at the .786 Fibonacci sell-off retracement level in the mid-$70s, raising the odds for a pullback that could find support at the .618 retracement in the upper $60s. The on-balance volume (OBV) accumulation-distribution indicator hit an all-time high in September 2019 but has struggled to clear that peak in the past eight months. That could change after console manufacturers finalize 2020 release dates.

Chart showing the share price performance of Take-Two Interactive Software, Inc. (TTWO)

Take-Two Interactive Software, Inc. (TTWO) is set to report earnings on May 20. This stock has booked the group's strongest returns since breaking out above the 2005 high at $29.60 in 2015. The rally hit an all-time high at $139.91 in October 2018, giving way to a major decline that found support at a 16-month low in February 2019. The subsequent bounce reversed just four points under resistance in August, yielding narrow range-bound action into a February 2020 breakdown.

A March reversal gathered strength at the start of April, remounting broken support before stalling within a point of the August peak in Tuesday's session. The stock has now mounted the .786 sell-off retracement level, raising the odds that a pullback will hold support in the mid-$120s and yield a final assault on the 2018 high. OBV is cooperating with this bullish effort, lifting to the highest high since January 2018.

Chart showing the share price performance of Electronic Arts Inc. (EA)

Electronic Arts Inc. (EA) beat fiscal fourth quarter 2020 earnings and revenue estimates in a May 5 release but lowered 2021 guidance. This manufacturer is highly dependent on sports games like "FIFA" and "Madden NFL," but those venues have been closed indefinitely due to the pandemic. As a result, it isn't surprising that this stock is the weakest of the three big gaming companies, trading just above the midpoint of 2018's broad trading range.

A multi-year uptrend topped out at $151.26 in July 2018, yielding a steep decline, followed by a bounce that mounted the .50 sell-off retracement level one month ago and stalled out. Even so, the short-term pattern looks bullish, suggesting that the stock will generate additional upside that fills the August 2018 gap at $129. However, OBV fell to a five-year low during the first quarter rout and has barely budged since that time, telling investors to lower expectations.

The Bottom Line

Video game stocks have recovered from first quarter losses and could test bull market highs in coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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