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What You Missed This Week in Video Games
The Fly

What You Missed This Week in Video Games

New ‘Legend of Zelda’ out this week

"Game On" is The Fly’s weekly recap of the stories powering up or beating down video game stocks.

NEW RELEASES: This week’s most significant new release is Nintendo’s (NTDOY) "The Legend of Zelda: Tears of the Kingdom," a sequel to 2017’s "Breath of the Wild" launching exclusively on Nintendo Switch systems on May 12.

SPENCER INTERVIEW: During an interview last week with Xbox gaming podcast Kinda Funny Xcast, Microsoft Gaming (MSFT) CEO Phil Spencer responded to a number of questions related to the U.K.’s Competition and Markets Authority blocking the company’s proposed takeover of Activision Blizzard (ATVI), the poor reception to recent exclusive release "Redfall," and Xbox’s "disappointing" output of exclusive first-party content. On the Activision deal, Spencer said that the proposed acquisition is not the brand’s main strategy, though it is an "accelerant" to its strategy and that Microsoft remains "committed" to the transaction.

In response to complaints about "Redfall," one of the first major Xbox exclusives made by a studio acquired in the Zenimax deal, the Xbox boss said the result was "not what we wanted," adding that nothing is more difficult than "disappointing the Xbox community." "I’m disappointed," Spencer said. "I’m upset with myself." The executive noted that while there were clearly quality issues with the game’s release, Xbox as a business will never push against the "creative aspirations" of its internal development teams, and that having games release to low 60s scores on Metacritic is just part of video game publishing. Looking ahead, Spencer told the Xcast that the company will announce brand new games at its June Showcase, adding that Xbox Game Studios will have games coming out every quarter in the future that will "surprise and delight" players, though he noted that "not every game we ship is for everybody."

Lastly, the executive commented on the Xbox Series X/S falling behind in market share to Sony‘s (SONY) PlayStation 5 and the Nintendo Switch, saying that simply having a lot of exclusive games on Xbox hardware won’t be enough to overtake the competition in that area. Spencer said that Xbox is not in the business of "outconsoling" Sony and Nintendo, especially since Microsoft "lost the worst generation to lose" with the Xbox One, since that generation normalized and expanded digital game libraries. Still, Spencer added that the business’ vision is to make sure Xbox players "don’t feel like second class citizens."

NINTENDO EARNINGS: On Tuesday, Nintendo reported a year-over-year decrease in 2023 revenue and operating profit, as well as a 22.1% year-over-year dip in hardware units sold. On the software side, the company said that "good sales were posted" for "Pokemon Scarlet" and "Pokemon Violet," which recorded a total sales of 22.1M units, and for "Splatoon 3," which sold 10.67M units. Other new titles released during the period also performed well, with "Nintendo Switch Sports" selling 9.60M units, Nintendo noted. "Among titles released through the end of the previous fiscal year, ‘Mario Kart 8 Deluxe’ sold 8.45M units, and ‘Kirby and the Forgotten Land’ sold 3.81M units," the company said. "As a result, there were 35 titles that sold over a million copies during the period, including titles from other software publishers. As for hardware, units sold declined 22.1% year-on-year to 17.97M units, as shortages of semiconductors and other components impacted production until around the end of summer, and we did not experience the growth in sales mainly during the holiday season that we saw in the previous fiscal year. The sales situation for software remained stable, but unit sales declined 9.0% year-on-year to 213.96M units, affected to some extent by the decline in hardware sales. Turning to the digital business for our dedicated video game platform, in addition to the impact of the depreciation of yen, sales of the downloadable versions of packaged software for Nintendo Switch performed well, and revenue related to Nintendo Switch Online increased, helping to push digital sales to JPY405.2B, up 12.7% year-on-year."

Looking ahead, Nintendo provided fiscal 2024 revenue and operating profit guidance, with president Shuntaro Furukawa saying on the company’s earnings call that the game maker has not factored new hardware into its current forecast. “Sustaining the Switch’s sales momentum will be difficult in its seventh year,” Furukawa said, according to Bloomberg. “Our goal of selling 15 million units this fiscal year is a bit of stretch. But we will do our best to bolster demand going into the holiday season so that we can achieve the goal.”

JEFFERIES MENTIONS ‘NEW MATH’: In a research note to investors, Jefferies analyst Andrew Uerkwitz said that macro weakness has been a common theme for video game publishers who are "missing the mark," noting that he spent the quarter struggling to reconcile macro weakness when several titles had very strong quarters. The analyst, who believes investors and companies need to "rethink the economics" of the video game sector, said that 2022 was a "down year" for the space, with console gaming revenue down 4% year-over-year, admittedly against tough COVID comps, but still below prior years’ growth rates.

In an analysis of gaming trends, Uerkwitz noted that live services and Free-to-Play games are "great value and time sinks," which means the cost per hour of playing games has gone down, resetting expectations for value in gaming. In addition, today’s players are more conditioned on cost, and network effects of games have made switching costs higher, the analyst said. Uerkwitz also noted that having many games designed to be "the only game you need to play" decreases the need to play multiple games, with so-called "Season Passes" for live services games continuing to add more content to keep players from leaving. In addition, the analyst said that, more than ever, games have a "competency moat," meaning titles becoming more and more complicated keeps players engaged and spending longer, but also that newer players that can’t keep up will churn out.

For investors, Uerkwitz said we should likely lower near-term estimates for non-AAA titles and think about flattening the revenue curve. For AAA games, we may have to think about adding a higher risk premium due to the more-hi-driven-than-ever-before nature of the title launch, the analyst added. Uerkwitz maintained Buy ratings on Take-Two (TTWO), Activision Blizzard, and Electronic Arts (EA).

EA TARGET CHANGES: Over the past week, no fewer than three firms raised their price targets ahead of Electronic Arts’ quarterly report on May 9. Last week, Credit Suisse raised the firm’s price target on the shares to $138 from $132 and maintained an Outperform rating, noting that all of the near-term model changes reflect the movement of various releases between quarters. Meanwhile, Truist analyst Matthew Thornton yesterday raised the firm’s price target on Electronic Arts to $138 from $130 and kept a Buy rating on the shares ahead of its Q1 results. The company is entering what has historically been the more favorable seasonal stretch from May through the holidays, and consensus estimates for the stock are "very reasonable" given the management’s recent cost efforts, the analyst tells investors in a research note.

In addition, Roth MKM analyst Eric Handler raised the firm’s price target on Electronic Arts to $130 from $112 but maintained a Neutral rating on the shares ahead of its Q4 results this week. The analyst stated that while the firm is pleased with the company’s restructuring, it is also more concerned with the state of the development pipeline and with mobile operations, noting that its FY24 EPS forecast of $6.30 could prove conservative, even though the consensus of $6.56 "appears aggressive". Roth MKM added that a successful mobile launch on May 10 for "The Lord of the Rings: The Battle For Middle Earth" would be a welcome event, although significant marketing expenses would likely limit near-term profits for the stock.

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