Gaming companies saw a spike in their business early in the pandemic as many people restricted to their homes spent more time inside playing video games. As expected, with the reopening of the economy, spending on other sources of entertainment has increased and growth rates of gaming companies have moderated.
That said, the long-term prospects for the gaming industry continue to be lucrative. According to a report by Mordor Intelligence, the gaming market is expected to grow at a CAGR of 8.94% over the 2022-2027 period to $339.95 billion.
Using the TipRanks stock comparison tool, we will compare Take-Two Interactive, Electronic Arts, and Roblox, to see which gaming stock the Street estimates to have a higher upside potential.
Take-Two Interactive Software (NASDAQ: TTWO)
Take-Two Interactive develops and publishes products mainly through Rockstar Games, 2K, Private Division, and T2 Mobile Games labels.
Known for popular titles like Grand Theft Auto and NBA 2K, Take-Two recently reported Q4 FY22 (ended March 31, 2022) adjusted EPS of $0.95, which declined 49.5% year-over-year but came ahead of analysts’ consensus of $0.65. Revenue grew 11% to $930 million and net bookings were up 8% to $846 million, lagging analysts’ estimate of $883 million.
Take-Two expects net bookings in the range of $3.75 to $3.85 billion (excluding the Zynga acquisition) in FY23, up from $3.41 billion in FY22. It boasts a robust multi-year pipeline, including 69 titles that the company plans to release through FY25.
Following the print, Wedbush analyst Michael Pachter stated, “We think investors are quite comfortable with this guidance since Take-Two management has historically guided well below its actual performance a year later.”
Pachter raised his net bookings and EPS estimates for FY23 (excluding Zynga) and noted that with no major incremental releases in FY23, a “handful of smaller games” will be the growth drivers. Pachter intends to further adjust his estimates on the completion of Zynga acquisition. Take-Two completed the $12.7 billion acquisition of mobile-gaming giant Zynga on May 23.
The analyst believes that the combination of Take-Two and Zynga has the potential to create a “gaming powerhouse with significant scale in the console, PC, and mobile marketplaces.”
In line with his optimism, Pachter maintained a Buy rating but lowered his price target on Take-Two stock to $145 from $180 to reflect recent multiple contraction for tech stocks, particularly video game publishers.
Including Pachter, 17 analysts rate Take-Two a Buy, while one analyst has a Hold rating. Overall, the stock has a Strong Buy consensus rating. The average Take-Two price target of $182.22 implies 47.40% upside potential in the 12 months ahead. Shares have declined nearly 30.4% so far this year.
Electronic Arts (NASDAQ: EA)
Electronic Arts offers popular content across franchises like Apex Legends, EA Sports FIFA, The Sims, and Madden NFL. The company will be rebranding its FIFA video game series to EA Sports FC next year as it’s nearly three decade long partnership with the Federation Internationale de Football Association or FIFA is ending.
It’s worth noting that Electronic Arts derives a significant portion (nearly 71% in FY22) of its revenue from live services, which include extra content, subscription offerings and other revenue generated in addition to the sale of the company’s base games and free-to-play games.
EA delivered mixed results for Q4 FY22 (ended March 31, 2022) results. Revenue grew nearly 36% to $1.83 billion, ahead of analysts’ estimate of $1.78 billion. Bookings were up 17.5% to $1.75 billion, but fell short of the Street’s consensus of $1.77 billion. Meanwhile, EPS jumped to $0.80 from $0.26 in Q4 FY22, beating analysts’ estimates of $0.66.
EA expects net bookings in the range of about $7.9 billion to $8.1 billion in FY23, up from $7.52 billion in FY22. The company’s solid pipeline includes six new EA Sports titles in FY23, and other interesting future releases including, Need for Speed, Dead Space, Star Wars, The Sims, Skate, Bioware franchises, and Lord of the Rings.
In reaction to the company’s recent results and outlook, MoffettNathanson analyst Clay Griffin upgraded EA stock to a Buy from Hold with a price target of $141.
In a note to investors, Griffin stated, “With a clean balance sheet, consistent and strong free cash flow generation, and a stable of other healthy franchises already in hand, EA is set up pretty well to weather continued market volatility.”
While Griffin acknowledges that rising interest rates are a drag on every financial asset, he feels that EA deserves an upgrade as it is a “significantly cheaper stock” and has relative advantages.
All in all, the Street has a Strong Buy consensus rating based on 15 Buys and four Holds. At $150.37, the average Electronic Arts price target implies 12.41% upside potential from current levels. Shares are up 1.4% year-to-date.
Roblox (NYSE: RBLX)
Metaverse is the buzzword in the tech world now and Roblox is one of the key players in this emerging space. Roblox offers an online platform that enables users to explore 3D digital worlds. Through Roblox Studio, developers and creators can build, publish, and operate 3D experiences and other content.
Last year, brands like Gucci, Nike (NKE), Chipotle (CMG), Warner Brothers (WBD) used the Roblox Platform to connect with their customers on the metaverse. The platform was also used by musical artists including 21 Pilots, Zara Larssen, and Poppy for hosting virtual concerts and holding album launch parties. Roblox attracted millions of kids to its platform in the early days of the pandemic. About 49% of the company’s 45.5 million DAUs (daily active users) in 2021 were under the age of 13.
The impact of the reopening of the economy was clear on Roblox’s Q1’22 results as the company missed analysts’ expectations for key metrics. Revenue grew 39% to $537 million with the average DAUs increasing 28% to 54.1 million. However, bookings declined 3% to $631.2 million. Loss per share narrowed to $0.27 from $0.46 in Q1’21 but was worse than analysts’ loss per share estimate of $0.21.
Wedbush analyst Nick McKay feels that while Roblox displayed continued strength from a user and engagement perspective in Q1, it has started showing signs of weakness with regard to player monetization.
McKay added, “For investor sentiment to turn, the company will need to prove it is capable of continuing to attract a more mature audience, mitigating its personnel and cloud costs, and expanding its player network further within North America.”
McKay reiterated a Hold rating with a price target of $28.
Overall, the Street is cautiously optimistic on Roblox, with a Moderate Buy consensus rating based on nine Buys, five Holds, and one Sell. The average Roblox price target of $42 implies 39.72% upside potential from current levels. Shares have plunged nearly 71% year-to-date.
Wall Street analysts are currently treading cautiously with regard to Roblox, but seem more optimistic on Take-Two Interactive and Electronic Arts. Based on the upside potential from current levels, Take-Two seems to be a better pick.
Several analysts are optimistic about Take-Two’s long-term prospects based on its strong content pipeline and the potential benefits from the Zynga acquisition. The game publishing space remains promising, as at-home trends sustain and the internet-of-things continues to advance.
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