Who Said Gaming Stocks Are Dead? They’re on Fire!
Gaming stocks tanked by 50% late last year, but now they have broken through important barriers and are on fire once again. | Source: REUTERS/Lucy Nicholson/File Photo
Activision Blizzard and Electronic Arts have suffered their share of slings and arrows. Gaming stocks can be notoriously hard to game, no pun intended. They are most akin to cyclical manufacturing stocks, oddly enough.
That’s because gaming itself goes through cycles. Sometimes content gets released and becomes a massive hit, and sometimes content just tanks.
Sometimes the content of one company will score big while the content of others will fail.
With the constant evolution of gaming platforms, gaming companies have had to scramble to keep up with these changes. Those that fail to stay ahead of the curve can see their stock prices get hammered as consumers migrate to where the latest platform content is emerging.
Activision Dumps and Recovers
Up until about seven years ago, Activision’s stock was relatively moribund. But five years ago, the stock began a multi-year run that took it from $20 per share to $84, a 320% gain.
Revenues and profits exploding are the reason behind a big jump. Activision had 2015 revenue of $4.66 billion, which leapt to $6.6 billion in 2016 and has been $7.1 billion in the trailing 12 months.
Meanwhile, $881 million of profit in 2015 has exploded to $1.69 billion in the trailing 12 months.
Activision is now generating almost $2 billion annually in free cash flow, has $4.6 billion of cash on its balance sheet, and only has about $2.6 billion in debt.
So what happened at the end of last year? Disappointing earnings along with the broader market decline cut Activision’s stock price in half.
Yet after bottoming out at $40, this year the stock has just climbed $54 a share. Although the stock continues to appear risky, this recovery bodes well.
Electronic Arts Stumbles and Soars
Electronic Arts has fared in a similar fashion.
Five years ago, the stock began its multi-year run that took it from $35 per share to $150, a 330% gain.
Revenues and profits increased here as well, but not as much. Electronic Arts had 2015 revenue of $4.4 billion, which leapt to $4.8 billion in 2016 but only hit $5.1 billion in the trailing 12 months.
Meanwhile, $1.15 billion of profit in 2015 has only climbed to $1.25 billion in the trailing 12 months.
Electronic Arts is now generating almost $1.3 billion annually in free cash flow but has $5.5 billion of cash on its balance sheet and less than $1 billion in debt.
So what happened? Electronic Arts flew just as high as Activision did but on less impressive results. In this case, it isn’t just that the stock fell from $135 to $78 but why it didn’t fall further.
Yet after bottoming out at $77, this year the stock has also just recovered to $99 a share.
As you can see from each company’s respective financial metrics, Activision is in a much better position than Electronic Arts is.
But Beware, Because Only One Stock Has Value
Activision is pegged to earn $2.52 per share next year, which gives it a P/E ratio of 22. It’s a bit pricey based on the expected 15% earnings growth the company will see.
Electronic Arts is expected to grow earnings by only 10% to $5.06 per share yet trades at a P/E ratio of 20. In my estimation, it appears to be vastly overvalued. Even if you back out the company’s $15 per share in net cash, it doesn’t change the fact that the stock is wildly overpriced.
All that being said, gaming continues to evolve in very exciting ways. After breaking higher, gaming stocks are apparently on fire again.
Disclaimer: The views expressed in this op-ed are solely those of the author and do not represent those of, nor should they be attributed to, CCN.com.
