With earnings season in full swing, two of the biggest names in video games are set to report their results on Thursday. Activision Blizzard (NASDAQ:ATVI) and Take-Two Interactive Software (NASDAQ:TTWO) are among the most noteworthy players in the industry right now.
Over the past five years, both companies have absolutely crushed the return of the broader market, with Take-Two up 318% and Activision increasing 173%, compared to the 62% gains of the S&P 500. Challenges dating back to late 2018, however, have weighed on the recent results of these video game purveyors, and they failed to keep pace with the broader market in 2019.
Can these two companies live up to Wall Street's expectations when they report their most recent quarterly results? Let's take a look at what to expect.
1. Activision Blizzard: Closing out a transition year
Activision Blizzard, best known for game titles including Call of Duty, World of Warcraft, and Overwatch, was riding high in late 2018 before the bottom dropped out. Competitive pressures and valuations hit many video game companies, and Activision wasn't spared.
After a couple of disappointing quarters, the company announced a massive restructuring to reinvigorate its business and spent much of 2019 in transition mode putting its plans into action. Recent results have showcased increased player engagement, which has buoyed investor confidence, and Activision stock has edged out the market over the past year.
For the fourth quarter of 2019, Activision is facing tough comps from its record 2018 fourth quarter and management is forecasting adjusted net revenue (including deferrals) of $2.65 billion. That would be a decline of about 6% year over year, resulting in adjusted earnings per share (EPS) of $1.15 (a drop of about 8%). Wall Street believes management's forecast is conservative and is expecting more, with analysts' consensus estimates are camped at $2.67 billion and EPS at $1.19.
Activision has scheduled its quarterly update for after the market close on Thursday, Feb. 6, and it will provide investors with insight into the company's ongoing transition.
2. Take-Two Interactive: Can it maintain recurrent spending momentum?
Take-Two, which brought gamers such franchises as Grand Theft Auto and Red Dead Redemption, faced many of the same competitive hurdles as its rival last year. After a huge run -- more than half a decade in the making -- Take-Two tumbled as investors soured on high valuations and the future prospects of video games. After a precipitous drop early last year, Take-Two gradually recovered much of its decline, but its stock growth is still trailing the broader market by more than seven percentage points over the past year.
Investors will be watching to see if Take-Two can maintain the momentum of players' recurrent consumer spending, a key component of the company's recent success. Gamer spending for items like virtual currency, add-on content, and in-game purchases impressed last quarter, growing 39% year over year and accounting for 45% of total net bookings.
Based on the strong results of its past two quarters, Take-Two raised its full-year guidance. The company now expects revenue to grow between 10% and 14% to about $2.98 billion at the midpoint of its guidance.
For its fiscal third quarter (which ended Dec. 31), Take-Two expects revenue in a range of $915 million to $965 million, a decline of about 25% at the midpoint of its guidance. The company is also forecasting earnings per share in a range of $1.39 to $1.49, which would represent a decline of between 5% and 11% compared to the prior-year quarter. Analysts' consensus estimates are calling for revenue of about $922 million and EPS of $1.75.
Take-Two has also scheduled its quarterly update for after the market close on Thursday, Feb. 6.
A final note about the upcoming console cycle
With the upcoming release of several new gaming consoles (the first major release cycle since 2013), investors could see a renaissance in video game stocks, with the biggest players returning to growth in the coming months.
Microsoft said it will release the Xbox Series X in time for the 2020 holiday shopping season. Sony made a similar announcement regarding the coming debut of PlayStation 5, which will also be available just ahead of the holidays. Neither company has yet to provide a firm date.
As gamers rush to pick up the latest consoles, video game publishers will release updates to their flagship titles, driving higher demand for these games. It's important to note that stocks of the three biggest video game publishers experienced a price run-up in the 12 months prior to the major console launches that occurred in 2000, 2005, and 2013, outperforming the market by a whopping 26%.