Investors looking for stocks that can thrive amid the market's wild swings - and a possible recession ahead - might look at video game stocks such as Electronic Arts Inc. (EA), Activision Blizzard Inc. (ATVI) and Take-Two Interactive Software Inc. (TTWO).
“We anticipate valuation multiples for video game companies to move higher owing to the relative safety of the interactive entertainment industry,” wrote BMO Capital Markets analyst Gerrick Johnson, according to a detailed story in Barron’s. “The video game industry is quite defensive.”
Why Analysts See Upside In Electronic Arts
- Better than expected results in Q4 and upbeat outlook for 2019
- Breakout success of Apex Legends free-to-play battle royale game
- Strong title lineup, stable franchises
- Share repurchases to drive high single digit EPS increases
Video Game Viewership Seen Surging In Recession
BMO says that the value of traditional video game franchises has been overlooked amid the unprecedented success of Fortnite's free-to-play game model.
“Interactive entertainment is one of the most inexpensive forms of entertainment as measured by cost divided by time consumed,” wrote Johnson. “Should an economic downturn take root, we would anticipate video game consumption to grow as those who lose (or are fearful of losing) their jobs, may pull back on discretionary spending in other bigger ticket areas.”
The likelihood of takeovers by major buyers such as Apple Inc. (AAPL), Alphabet Inc.’s (GOOGL) Google, Sony and Microsoft Corp. (MSFT) may also serve as catalysts for video game stocks, especially Take-Two, the owner of the Grand Theft Auto franchise and Red Dead Redemption 2.
Take Two Interactive
Take Two’s strong balance sheet could make it particularly attractive as a takeover target, according to Johnson, who upgraded the stock to market perform. Cowen analysts are also optimistic about Take Two’s new console launches slated for 2020, per another Barron’s report. While bears have feared competition from Fortnite, Cowen analyst Doug Creutz views the stock as the best play on the next generation of consoles.
Another firm, Jefferies, expects a strong title pipeline and new online game offerings in 2019 to lift the stock nearly 21% from current levels over 12 months, per Barron's.
Electronic Arts is also seen as performing well, rising on better-than-expected quarterly results and 2019 guidance. JPMorgan’s Alexia Quadrani was among the bulls who presented an upbeat outlook after the report, reiterating an overweight rating and lifting her target, per Barron's.
While video game stocks may benefit from tailwinds this year and in 2020, several have trailed the broader S&P 500 this year. But the big test will be how well these "recession-resistant" stocks perform in a downturn.