I am interested in video games as an investor & a gamer. Here's my objective view supported by data, research & facts of how each publisher did in the prior quarter & the outlook ahead:
Prior edition:
CY Q2 '22 Bookings vs the prior quarter:
- ATVI: $1,637m (down $284m or 14.8%)
- Bookings were down primarily due to Activision (-$299m or -37.9%)
- Decrease is primarily due to Call of Duty
- EA: $1,299m (down $37m or 2.8%)
- That includes Full Game sales (down $117m or 41.5%; this is primarily due to last year including releases for Mass Effect Remaster and It Takes Two without a comparable release during the current quarter)
- Live Services (up $80m or 7.6%; primarily due to Apex Legends, acquisitions, and FIFA)
- TTWO: $1,103m (up $391m or 49.1%)
- The increase is primarily due to the recent Zynga acquisition, NBA, and WWE
- Excluding Zynga, TTWO's bookings would have been $731m or up 3% y/y
- General Takeaways:
- ATVI continues to struggle due to lower engagement with Call of Duty
- EA & TTWO results were within expectations
Full Year Bookings Guidance vs prior guidance:
- ATVI: N/A
- No guidance available since they're about to be acquired by Microsoft
- EA: $7,900m – $8,100m (no change)
- No change in prior guidance since EA Sports outperforming will offset headwinds from a weaker mobile market and strengthening U.S. dollar
- TTWO: $5,800m – $5,900m (up $2,050m or 53.2% – 54.7%)
- Increase is primarily due to the recent Zynga acquisition
- Focusing on 2K & Rockstar to exclude the noise from acquisitions & smaller parts of the business, guidance is $3,132m – $3,186m. That's down $243m – $279m or 7.2% – 8.1%.
- That's assuming mobile & Private Division accounted for 10% of the prior guidance and 46% of the current guidance
- General Takeaways:
- ATVI gives no guidance, but it's irrelevant since they're about to be acquired. I also expect results to improve with Call of Duty: Modern Warfare II and Overwatch II
- EA did not change their guidance showing that the business is still performing well
- TTWO was able to show more details about how the business will look with Zynga, but guidance xZynga was weaker due to game delays and some weakness for GTA
Latest Price Targets after updating my forecasts:
- ATVI: $95
- Based on Microsoft's acquisition price
- My due diligence on why the deal will go through: My research on why ATVI is undervalued after Microsoft's acquisition : stocks (reddit.com)
- EA: $130 – $132
- 15x multiple on FY '23 EBITDA of $2,400m – $2,445m
- This is aligned with EA's guidance
- I previously gave the stock a 20x multiple, but valuations are decreasing across the stock market and they have an unusually high amount of EBITDA adjustments this year given their acquisitions. As a result, I lowered my assigned multiple by 5pp.
- I expect the company to be sold this year or in 2023 based on recent reports that EA is trying to sell itself to big tech. More details: Report: EA Was Deep In Merger Talks With NBCUniversal (kotaku.com)
- A 20x multiple on the same FY '23 EBITDA forecast suggests a $173 – $176 price target
- TTWO: $114 – $120
- 20x multiple of FY '23 EBITDA of $1,060m – $1,109m
- This is aligned with TTWO's guidance
- I previously gave the stock a 25x multiple, but valuations are decreasing across the stock market and they have an unusually high amount of EBITDA adjustments this year given their Zynga acquisition. As a result, I lowered my assigned multiple by 5pp,
- Could earn a higher multiple in the future since it's the largest metaverse company on earth that the stock market isn't fully appreciating, Zynga integration upside in 1 -2 years, GTA 6 upside in 3 – 5 years, & could be an attractive acquisition target for big tech that want a top player in gaming & metaverse with a digestible market cap (only $21 billion)
- A 25x multiple on the same FY '23 EBITDA forecast suggests a $146 – $153 price target
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