Extra Lives: What's Driving the Surge in Video-Game Stocks

  • Industry successfully navigates transition to digital age
  • Game franchises look like better bets than Hollywood movies

Video-game executives headed for the annual E3 gathering in Los Angeles next week are looking a lot smarter than their counterparts in other corners of the entertainment industry.

While movie and TV studios continued to be roiled by new forms of digital entertainment, video-game companies have come through looking like winners, with revenue growing and their stocks at all-time highs. The convention running June 13 to June 15 will show just how much the $109 billion business has changed.

The Electronic Entertainment Expo sold 15,000 tickets to consumers this year, a first for a show historically focused on industry insiders and the media who cover the business. Mobile games and virtual reality will be featured at E3, along with traditional console titles. The expo also will host is first esports contests, allowing fans and professionals to compete in front of audiences.

“Wall Street got caught up in the negative sentiment about the console business and was surprised by how well they’re all doing,” said Mike Vorhaus, president of the consulting firm Frank N. Magid Associates. “They’re killing it on the digital revenue.”

That digital growth is making video games look more like long-lived cash machines than just another media product facing an uncertain future. The industry’s global sales are forecast to grow 7.7 percent this year, according to researcher Newzoo.

The latest edition of Grand Theft Auto came out four years ago, for example, but the combination street racing, first-person shooter game was a big reason why publisher Take-Two Interactive Software Inc.’s sales jumped 26 percent last year to $1.78 billion. Like other developers, New York-based Take-Two has enticed customers to continue playing games long after their initial purchase, convincing them to spend real money on virtual cars, clothes and houses they can show off online.

At Electronic Arts Inc., full-game downloads, subscriptions, in-game advertising and other digital sources added up to more than $3 billion in revenue last year, 61 percent of the company’s total. The Redwood City, California-based company, home to the Madden NFL and FIFA soccer games, told investors in May it got $832 million in revenue last year from customers buying players in an online fantasy sports service it calls Ultimate Team.

Weekly Events

“We have events every week where you compete with friends,” said Blake Jorgensen, chief financial officer. “People love that stuff.”

Publishers will still show off their top new releases next week, including Electronic Arts’ Star Wars Battlefront II and Activision Blizzard Inc.’s Call of Duty: WWII. Microsoft Corp. is expected to reveal new details about its high-powered Project Scorpio console, due later this year, while Nintendo Co. will highlight its new Switch gaming device and related software.

As the video-game makers become less dependent on one-time sales of new discs at Christmas time, investors are rewarding them with higher stock-market valuations. Shares of Take-Two have almost tripled over the past two years, while Activision has more than doubled and Electronic Arts is up more than 80 percent.

Activision, the Santa Monica, California-based publisher of Destiny, Overwatch and other franchises, trades at 42 times trailing 12-month earnings. Two years ago that ratio was below 20 for the largest independent game company.

Brian Nowak, an analyst with Morgan Stanley, said the Wall Street earnings estimates for Activision and Electronic Arts are too low, failing to reflect an acceleration in revenue from higher-margin digital sources.

Yet with the stocks up, the shares are also approaching the 12-month price targets of Michael Pachter, an analyst at Wedbush Securities in Los Angeles. His target for Activision is $62.50; the stock closed Thursday at $60.55. His target for Electronic Arts is $116; the shares closed at $114.29.

“They’re pretty expensive,” Pachter said.

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