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These 2 Stocks Are Set To See Big Gains From The Next Videogame Cycle

These 2 Stocks Are Set To See Big Gains From The Next Videogame Cycle

There’s a big catalyst on the horizon that could send these 2 videogame stocks soaring.

In the gaming universe, there’s something that happens every five to eight years that sparks a rally for videogame stocks.

And a new cycle is about to begin: Sony (NYSE: SNE) is preparing to release the next generation PlayStation 5 just in time for the 2020 holidays, and Microsoft (NASDAQ: MSFT) is releasing its new Xbox—codename Project Scarlett—console around the same time.

On average, videogame publishers—including Activision Blizzard (NASDAQ: ATVI), Take-Two Interactive (NASDAQ: TTWO), and Electronic Arts (NASDAQ: EA)—outperform the broader market by 26 percentage points in the 12 months preceding the major console launches of 2000, 2005, and 2013, according to Cowen.

Jefferies analyst Alex Giaimo says the hype around these new consoles is good news for game publisher stocks. 

“It’s positive headline noise,” Giaimo said. “If you’re a gamer, if you drop $400 to $500 for a console, you’re obviously going to buy some games, too. It creates consumer demand.”

There’s been some concern for game publishers recently surrounding new subscription gaming services like Google’s Stadia and Apple’s Arcade, which some say could cannibalize the traditional console business.

But according to one gaming expert, the demand for blockbuster console games has never been stronger.

Microsoft Xbox Platform and Devices general manager Jeff Gattis said to Barron’s that the next Xbox console will deliver better immersion for gamers with its more advanced capabilities.

“At Xbox, we believe playing on console remains the flagship living-room experience for players who want a device designed, built, and optimized for gaming,” Gattis said. “Project Scarlett will set a new bar for console power, speed, and performance… the next generation will not only bring games that look better, but will deliver a new level of immersion that brings worlds and characters to life in more complex ways and allow you to start exploring right away.”

It’ll be difficult for streaming services to top that kind of experience, and while Apple Arcade is getting some attention from its collection of lower-budget, artsy games, those titles can’t compare with big franchises like Activision’s Call of Duty, and Take-Two’s Grand Theft Auto.

In addition to Grand Theft Auto, Take-Two has several other popular franchises including Red Dead Redemption, Borderlands, NBA 2K20, Outer Worlds, and Ancestors: The Humankind Odyssey. Activision owns some of the biggest franchise titles in the industry including, World of Warcraft, Guitar Hero, and Overwatch, which has quickly become one of the company’s $1-billion-plus franchises and has become the foundation for Activision’s Overwatch League, the company’s biggest entry into the e-sports arena.

Wedbush Securities’ videogame analyst Michael Pachter has Outperform ratings on Activision, Take-Two, and EA, but says of the three, Activision is his top pick followed by Take-Two. Both of these companies own the bulk of their content, while EA has a heavy reliance on licensed sports properties that require significant royalty payments.

“I like EA the least of these three because of the bulk of those revenues come from licensed [intellectual property],” Pachter said. “Their owned IP isn’t that great.”

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