For this week's edition of "Game On," The Fly spoke with Jefferies analyst Alex Giaimo in an exclusive interview on a variety of gaming subjects, including the upcoming earnings season for big publishers, cloud gaming, and more.
NEW CONSOLES: Ahead of the launch of Microsoft's (MSFT) Xbox Series X and Sony's (SNE) PlayStation 5, The Fly asked the Jefferies analyst which major Western gaming publisher he believes will benefit most from the new consoles, at least in the first few months.
“I think all of them will obviously stand to benefit to a certain extent," Giaimo said. "I would call out Activision (ATVI) right now, just because the momentum in the ‘Call of Duty’ franchise has really been outsized in recent months. You obviously have a new game coming in a few weeks here, and it’s coming at a time in which you’re seeing more momentum within that franchise now than we’ve perhaps ever seen. Another interesting dynamic is Activision and Take-Two (TTWO) have come out and said a few of their games will actually [cost] $70 instead of $60, so just from a financial standpoint for these stocks, that’s a net benefit as well. 2-3 years from now, we would think a majority of players are on the next-generation consoles, so you’ll see a broader price increase across the board.”
The analyst noted that the new consoles will be a "net tailwind" for "all these companies," namely Activision Blizzard, Take-Two, and Electronic Arts (EA). "In the past, publishers really try to time up some of their bigger content with these releases," he added. "But if I had to pick one, I would stick with Activision.”
EARNINGS: When asked which of the "big three" U.S. publishers he expects to have the best earnings report this quarter, Giaimo noted that investors are expecting "pretty significant beats across the board." "We haven’t really seen the major slowdown across the sector that I think a lot of investors were assuming would come at some point in the summer or into the fall," the analyst said. "I think it’s interesting when you look at some of the recent Metacritic and reviews for some of these sports games that have come out, like 'FIFA,' 'Madden,' and 'NBA 2K.' The scores are down pretty considerably compared to last year and where they’ve averaged over the last five years. So investors are curious as to whether that will bleed into the results. Could you see a less sizable beat from EA this quarter if some of those sports games start to slow down?”
“It has yet to be seen, but again I go back to Activision on the question of who should probably have the most outsized beat," he added. "You have the ‘Warzone’ impact, you had a few smaller titles from Activision come out recently which are tracking pretty well, such as the 'Tony Hawk' game and the 'Crash Bandicoot' game. And what you’re seeing on the Blizzard size is continued strength from ‘World of Warcraft’ and the other franchises.”
“What I’ll say about Activision is that they have the most balance when it comes to platform distribution," Giaimo continued. "About a third of their content is on mobile, a third is on PC, and a third is on console, so they are best positioned to benefit from the broader tailwinds that the sector has been seeing.”
M&A: On the subject of further M&A in the gaming sector in light of Microsoft's proposed $7.5B acquisition of Bethesda, Giaimo said he believes asset prices right now are "probably at a premium" to where they've historically been, both on the public and private sides. “We always thought the valuation [for Bethesda] would be closer to $5B-$6B, so I do you’re seeing premiums paid right now for high-quality companies within the space," he told The Fly. "There is a lack of strong options out there, which has always been the challenge within the gaming space. The majority of big games that come out every year are coming from the same top players, and really the top of the food chain is pretty heavily skewed towards the major publishers.”
“I would note that all of the major Western publishers are sitting at all-time high net cash positions, so they certainly have the ammunition to do something large if they would like to," the analyst added. "I continue to believe that the majority of M&A we’ll see will be on the mobile side for a few different reasons. I think mobile is the fastest-growing subsegment in video games, and also there’s the most options out there. It’s the easiest sector for a smaller company to come in and have some success. So I do think you have a lot of global options out there. You have consolidation that’s already taken place. And when you look at larger-scale video game M&A on the console and PC side, it’s been few and far between.”
SUBSCRIPTION SERVICE: When asked if he sees Take-Two or Activision Blizzard putting more of their titles on subscription services such as Xbox Game Pass, as EA appears to be doing by having EA Play available on the Microsoft service, the Jefferies analyst said he believes subscription offerings within the gaming space will be more tailored towards catalogue titles. "I don’t think you’ll ever see a situation in which the newest 'Grand Theft Auto' or 'Call of Duty' will be bundled into some form of subscription offering, just because it’s difficult for the economics to make sense for the publishers," he said. “I think what EA is doing makes a lot of sense because EA probably has the richest catalogue amongst all the publishers out there. They have years and years worth of sports titles, plus they have a lot of smaller games that have an audience that’s still there.”
Giaimo noted that the video game space is very different from the traditional media space, where a Netflix (NFLX) subscriber might be watching 10-20 shows a month, whereas video game players are usually only playing 2-3 games at one time. "So economically it’s just difficult for a subscription to make sense for the top titles, but we do think it will be an ancillary revenue opportunity for some of these publishers," he added.
STREAMING: On the topic of cloud gaming and streaming, Giaimo said he thinks it's "still too early" for big publishers to be particularly concerned about adoption. "I think the cloud streaming theme will become more clear 3-5 years from now, especially considering that we are about to enter a new hardware cycle," he said. "I just think in the near-term that’s going to be the major focus for the publishers. What I will say is that if the technology improves and players are willing to adapt to these streaming services, you’re going to open up the addressable market. We think there are about 200M console game players right now. We know there are 1B households with a connected TV. So it could just become a much more seamless situation in which you no longer have to go out and purchase the hardware, you can just download a game and play it right away. That has the potential to be a very big tailwind for the industry. We just think, right now, that the technology still needs a few years to get there.” Companies in the game streaming space include Microsoft, Google (GOOG), Amazon (AMZN), and Facebook (FB).
"Game On" is The Fly's weekly recap of the stories powering up or beating down video game stocks.
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