As social distancing becomes our new reality amid the coronavirus crisis, Cowen analyst Doug Creutz says videogame stocks could see a boost.
And as an added bonus, these stocks also tend to be recession-resistant – a major plus considering Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and other big names on Wall Street said this week that the COVID-19 has already sparked a global recession.
“While all stocks are getting caught in the current downdraft, some companies are going to see less impact to fundamentals than others,” Creutz wrote in a note from this week. “We believe that the videogame sector rather uniquely is poised to see very little disruption to results over the next 12 months in all but the most severe (read: the stock market will the the least of our problems) scenarios. As such, we view the sector as a logical place to favor in the current volatile market environment.”
“It’s also worth noting that the video game companies generally have cash-rich balance sheets, with little or no debt,” Creutz added. “As such, if a recession does put strains upon the financial system, the sector isn’t in a position where it could face liquidity issues.”
In Creutz’s view, video games will see increased engagement as people stay home. Given that video games often include voice chat, they give players a way to socialize when they are self-isolating and quarantining at home.
Players should also have more money to spend on games and digital add-ons within games as vacations are delayed, events are cancelled, and restaurants are closed.
In the event of a recession, Creutz says that video game producers should only see modest pressure on earnings. The analyst also noted that even as studios enforce work-from-home policies, none of his picks have cited serious near-term delays when it comes to developing new games. While Creutz expects some loss in terms of productivity, he says videogame companies should fare better than other entertainment sectors, especially television and film.
SunTrust Robinson Humphrey analyst Matthew Thornton reiterated his Buy ratings on two of Creutz’s top picks, EA and Take-Two, calling them “good houses in a bad coronavirus neighborhood.”
Thornton agrees with Creutz that videogame stocks should see a benefit from the coronavirus fallout as they provide digitally delivered at-home entertainment, adding that any accelerated mix shift to digital downloads from in-store physical game sales is accretive to game makers’ profit margins.
Elsewhere, Oppenheimer analyst Andrew Uerkwitz initiated coverage on Zynga stock this week with an Outperform rating and a $7.50 price target – 18% higher than the current price.
“We believe ZNGA is unique in capturing strong fundamental growth in the mobile gaming space on leveraging its core competency of customer acquisition/monetization in both organic titles, licensed IP, and further industry consolidation,” Uerkwitz wrote in a note. “While we believe mobile gaming is very difficult to predict due to low barriers to entry and changing competitive dynamics, Zynga’s history, scale and strategy should lower the uncertainty.”