This Analyst Is A Buyer Of Video Game Stocks On Pullbacks

Video game stocks haven't been spared from this market volatility, but the pullback represents a "meaningful buying opportunity based on what we know now," according to KeyBanc.

The Analyst

KeyBanc Capital Markets' Evan Wingren maintains an Overweight rating on the following names:

• Activision Blizzard, Inc. (NASDAQ: ATVI), $83 price target.
• Electronic Arts Inc. (NASDAQ: EA), $152 price target.
• Take-Two Interactive Software, Inc (NASDAQ: TTWO), $144 price target.

The Thesis

KeyBanc oversaw a proprietary survey among gamers who play "Fortnite," which found the game continued to gain momentum in absolute terms in March but percentage gains on a month-over-month basis slowed down, Wingren said in a research report. The survey found "Fortnite" players' most played games are Activision's "Call of Duty" and Take-Two's "Grand Theft Auto" and gamers are playing these games less often compared to "Fortnite."

In terms of monetization, 71 percent of "Fortnite" players buy in-game items on a regular basis, which may imply a negative near-term impact to Activision and Take-Two's own monetization outlook, Wingren said. Time spent per game could fall, but gamers would still have an affinity for many games that could motivate gamers to spend more money to "keep up" instead of proceeding with the "normal grind" for extra content.

Buy The Dip

Wingren highlighted in a report in early March the potential woes "Fortnite" would bring to the gaming industry. Since then, shares of Activision, Electronic Arts and Take Two have fallen 17 percent, 18 percent and 8 percent, respectively. The math behind the decline implies the market is now assuming a 5 to 6 percent company-specific earnings declines over the next year for Activision and Take Two.

The math also implies a reduction in 13 cents per share in earnings for Activision and 32 cents per share for Take Two over the next year.

Related Link:

Take-Two's New Games, Digital Distribution Shift Underpin Bullish KeyBanc Thesis

How Video Game Developers Are Taking On 'Fortnite' — And Why KeyBanc Remains Bullish