Outlook Brightens for Video Game Stocks

Video game manufacturers have reported mixed quarterly results in recent sessions, offering few clues about what to expect for the rest of 2020. However, sales should pick up substantially by year end because Sony Corporation (SNE) and Microsoft Corporation (MSFT) are set to release new versions of their hugely popular game consoles during the holiday season, providing the positive catalyst needed for higher prices.

Investors expected a sales surge in November 2019 when Alphabet Inc. (GOOGL) released the revolutionary browser-based Stadia gaming service, but the initiative opened to mixed reviews, with many users complaining about poor image quality. Web and professional reviewers criticized the poorly constructed subscription model at the same time, as well as the lack of 4K support and slow frame rates. The company still hasn’t told the community when it expects to fix these issues.

Electronic Arts Inc. (EA) beat third quarter 2019 top- and bottom-line estimates in its Jan. 30 report but warned about fourth results, triggering a two-day slide to a seven-week low. The stock posted an all-time high at $151.26 in July 2018 and entered a persistent downtrend that carved a 50% loss into the December low at $76.76. It bounced back above $100 in February 2019 and stalled, marking a resistance level that limited upside into a December breakout. It posted a 15-month high in January and reversed once again, failing the breakout after the earnings report.

The 2019 recovery wave reached the .382 Fibonacci sell-off retracement level, while the rally into 2020 reversed at the .50 retracement. The decline into February has held 200-day exponential moving average (EMA) support so far, but the on-balance volume (OBV) accumulation-distribution indicator has hardly budged in the past 10 months, warning that sidelined investors are keeping their powder dry for now, waiting for a lower-risk buying opportunity.

Take-Two Interactive Software, Inc. (TTWO) missed third quarter 2019 earnings per share (EPS) estimates and reported in-line revenues in Thursday’s post-market report. Bearish guidance also caught the attention of shareholders, with the company raising fourth quarter revenue estimates but lowering EPS forecasts. The stock sold off nearly 9% in reaction to the news and added to those losses ahead of Friday’s opening bell, setting up a test at the November low.

The stock performed well for many years, lifting from the single digits in 2012 into October 2018’s all-time high at $139.81. A persistent downtrend then took control, dumping Take-Two stock into an 18-month low in the mid-$80s in March 2019. It tested the prior high during a mid-summer rally wave but failed to break out, entering narrow range-bound action that could now give way to a high-percentage decline.

Activision Blizzard, Inc. (ATVI) beat fourth quarter 2019 profit estimates by nearly 100%, reporting EPS of $0.68 despite expectations of just $0.36. Revenues met expectations but still declined 4.5% year over year, highlighting industry headwinds. Investors ignored downside guidance for the first quarter of 2020 and mixed guidance for the fiscal year, lifting the stock about 2% in Thursday’s post-market. Activision shares added to those gains ahead of the opening bell, continuing the buy-the-news reaction.

The stock tested support near $10 for nearly four years and turned higher in 2012, entering an uptrend that posted an all-time high at $84.68 in October 2018. The subsequent decline accelerated after a weak November earnings report, continuing into February 2019 before bottoming out at a two-year low in the lower $30s. The uptick into January 2020 stalled less than point under the gap top, yielding a minor pullback, while this morning’s rally is within striking distance of that resistance level.

U.S. video game companies are struggling to meet quarterly expectations, but positive fourth quarter catalysts could lift these stocks to new highs. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.