Activision, Take-Two Could See Disappointing Earnings Ahead

So much to play, so little time.

Activision Blizzard, Inc. (NASDAQ: ATVI) and Take Two Interactive Software Inc (NASDAQ: TTWO) will wrap up this release season for the most valuable consumer resources.

“Because of the crowded slate and continued expansion of in-game live services, we expect the 2018 competition for gamer time — more so than for gamer dollars (directly) — to be intense,” Cowen analysts Doug Creutz and Stephen Glagola wrote in a Monday note.

Anticipating a rocky 12 to 18 months, Cowen downgraded Activision Blizzard and Take Two to Market Perform.

Dodging Competition

The last five years saw an estimated 4-percent annual growth in software driven by a “dramatic,” 20-percent growth in digital content, according to Cowen.

And that rate isn’t likely to slow. Analysts expect nearly 10-percent year-over-year industry growth in 2018 — “the highest since the dual Wii/music genre bubbles of 2007-08” — with the release class more formidable than that of any other year.

Related Link: Making Gains In Video Games: Analyst Gets Bullish On Activision, EA And Take Two

The effects of proliferating competition, compounded by annual unit sales declines, don’t bode well for gamemakers.

“After a tremendous five-year run, we think the video game stocks are heading into choppy waters,” Creutz and Glagola wrote, noting that the number of successful releases will contract as consumers solidify franchise loyalties.

Bottom-Line Implications

The analysts consider buy-side 2018 earnings expectations “highly unrealistic,” with aggregate earnings-per-share estimates at least 15 to 20 percent above Cowen’s.

At the same time, the close correlation between gaming stocks suggest that one poor performance will weigh on the cohort.

“As a result, while we don’t necessarily expect every name in the group to disappoint on earnings relative to bullish expectations next year (though we do view that as a possibility), even if just one or two names do, we expect it to deflate what we view as aggressively bullish sector sentiment, pressuring valuations across the board,” Creutz and Glagola said.

Despite its downgrades, the firm maintains price targets for Activision Blizzard ($66) and Take Two ($83), which at the time of publication traded at $61.22, down 3.21 percent on the day, and $103.09, down 3.86 percent on the day, respectively.

But things should get better with time, and Cowen expects to retake bullish positions on some of the stocks next year.

“We remain believers in the long-term future of the industry and believe it will continue to benefit from time- and wallet-share take from other media,” the analysts wrote.