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Electronic Arts Upgraded, Take-Two Interactive Downgraded

By Rich Smith – Updated Apr 15, 2019 at 11:38AM

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And all eyes turn to Activision Blizzard.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Man, oh, man! Has it ever been an exciting month for video game investors!

Last week, two of the biggest names in the industry, Electronic Arts (EA -0.21%) and Take-Two Interactive (TTWO 2.14%), both reported their financial results for the final quarter of 2018. EA reported an 11% gain in sales year over year -- but missed earnings expectations big time. Boosted by the success of Red Dead Redemption 2 (RDR2) Take-Two scored an even bigger sales gain of 160%...and also missed earnings. Both companies announced guidance well below expectations, and suffered sell-offs as a result.

And yet, one week after the news, Wall Street is treating these two companies very differently indeed.

Check out the latest earnings call transcript for Electronic Arts, Take-Two, and Activision Blizzard.

5 characters from Fortnite

Could these guys really be responsible for torpedoing earnings at Electronic Arts and Take-Two? at Image source: Epic Games.

Upgrading EA

Let's begin with Electronic Arts -- because it's always nice to begin on a bright note. Last week, it was revealed that EA's new Apex Legends battle-royale-style video game rushed off to a strong start, racking up 10 million new players in its first 72 hours on the market.

In response to that news, megabanker Merrill Lynch announced yesterday that it was upgrading Electronic Arts stock to buy and assigning a $110 price target. (Piper Jaffray, already optimistic about the shares, upped its price target to $99.)

And of course, all this happened before EA told investors after close of trading that its Apex Legends player count had more than doubled. In its first full week on the market, Apex Legends has already racked up 25 million players, with as many as 2 million gamers online and playing together at any given time.

This news has already spawned one additional price-target hike, with R.W. Baird raising its estimated value on already buy-rated EA to $106. As Baird noted, Apex Legends hit 25 million users nearly six times faster than the "phenom" that is Fortnite.

Downgrading Take-Two

Now for the bad news. Despite reporting staggeringly great revenue growth last quarter, Take-Two Interactive's Red Dead Redemption 2 is currently only at 23 million players -- and already, at least one analyst is getting nervous.

This morning, BMO Capital announced it is downgrading Take-Two stock from market perform to underperform (i.e., sell). Even worse, the analyst cites RDR2 as its reason for downgrading the stock.

RDR2 has benefited from a two-year-long "hype machine" to support its initial wave of sales, points out BMO in a note covered on That promotional effort obviously paid off in spades given the company's 160% year-over-year sales gain. But after its strong initial push, BMO says the buzz around RDR2 has "dissipated markedly."

If Take-Two can't keep players engaged with RDR2 (and judging from EA's latest announcement, it appears that Apex Legends could be a big distraction), then the company could have real problems with in-game sales, which would prevent it from fully monetizing RDR2 over time.

BMO is taking a better-safe-than-sorry approach and exiting Take-Two stock before things have a chance to get any worse.

Lights, cameras, Activision!

Of course, all of the above leads up to today's main event: Activision Blizzard's (ATVI 1.34%) Q4 earnings report, which will come out after the close of trading. Even with its stock down more than 50% over the last four months, Activision remains the heavyweight of the gaming world, with a $31.5 billion market capitalization that eclipses both EA ($30 billion) and Take-Two ($9.3 billion).

But initial indications are that Activision's earnings news won't be good.

Sure, analysts are still predicting strong numbers from the company -- $1.28 per share in earnings according to Yahoo! Finance, up 36% from last year, and 15% revenue growth to more than $3 billion. However, CNBC is reporting that Activision is expected to announce job cuts as part of its earnings release, and analysts at Oppenheimer are warning investors to "stay away from this stock."

The upshot for investors

Is that the right call?

Perhaps it is, but I have to say that the more Wall Street gets pessimistic about this stock (and about EA and Take-Two as well, for that matter), the more I think investors might want to take a closer look. Although valued at nearly 55 times earnings currently, Activision stock sells for only 17.5 times trailing free cash flow (and even less if you give the stock credit for its net cash position). That's not too much of a premium to pay for the 15% projected long-term growth rate for Activision.

Investors willing to weather some "fortnites" of turbulence and own this stock for the long haul might want to take advantage of any post-earnings sell-off to pick up a few shares of Activision.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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