Video games have been around for decades and over the years the market has seen many game makers come and go. In this piece, we used TipRanks’ comparison tool to evaluate three video game stocks: Roblox (RBLX), Take-Two Interactive (TWO) and Activision Blizzard (ATVIA). Recently, metaverse play Roblox has taken on game makers ATVI and TTWO. However, a closer look reveals reasons to be optimistic about Activision Blizzard, neutral about Take-Two Interactive and bearish about Roblox.
For some companies in the space, video games are everything to them, while others have their fingers in enough pies that they don’t live and die from what happens with their next video game release.
The state of the video game industry
Some companies, such as Microsoft (MSFT), have stamina because video games aren’t their whole business, while others, like Capcom (CCOEY), survive only thanks to the strength of their video game brands. Of course, Microsoft also takes advantage of the power of its Xbox line of game consoles.
Overall, the global gaming market is expected to be worth $268.8 billion by 2025, up from $178 billion in 2021. In-game purchases are expected to be $74 million of that 2025 total. Believe it or not, the video game industry is bigger than the music and movie industries combined.
The pandemic may have played a part in the growth of video games over the past two years, as most people were confined to their homes during the early months of the pandemic, leaving them with nothing to do. The growing popularity of esports may also play a role in video game adoption.
Of course, the strongest video game creators will be the ones that can adapt to changing technologies and the whims of gamers. The next big thing in video games is the metaverse, which could be why investors think Roblox is a good game. However, it is always best to read between the lines when choosing long-term positions.
Roblox
The first thing to realize about Roblox is that it is not profitable, and Wall Street is dumping unprofitable companies, at least for now. All that euphoria that drove investors eager to acquire shares of money-losing companies is now over, leaving names like Roblox out in the cold, despite the metaverse connection.
In addition to losing money, Roblox also lacks profit estimates. For the June quarter, it reported a loss of $0.30 per share on revenue of $639.9 million, compared to projected losses of $0.25 per share on $626.2 million in revenue. In the previous quarter, the playmaker reported losses of $0.27 per share on $631.2 million in revenue, compared to the consensus of $0.22 per share in losses on $646.2 million in revenue.
Because it is losing money, Roblox cannot be valued using a P/E ratio and is down 44% since its first public offering in March 2021. Year-to-date, the gamemaker has lost over 60%. As for Roblox’s balance sheet, it had $3,075 billion in cash and equivalents at the end of June.
Roblox’s total debt, valued at $1.44 billion, is low compared to its cash, as it has paid off its debt. Still, Roblox’s total liabilities continue to grow, reaching $4.4 billion in June. While the gaming platform’s markup generated positive free cash flow in previous quarters, it shifted to the red for the June quarter.
The question investors should be asking now is whether Roblox was a fad that is starting to fade. Even insiders have sold $5 million worth of company stock in the past three months, and hedge funds have lost 3.8 million shares.
With negative momentum, return on equity and technical data, it’s hard to find anything nice about Roblox. Just about the only thing that could boost the playmaker’s stock is a short squeeze, as 8% of the float is sold short, while the off-exchange short volume ratio is 46%.
We’ve already seen some effects of a short squeeze in the stock, with Bloomberg even labeling it as a battleground for bears and growth investors. However, Roblox stocks quickly reversed and continued their downward trend.
What is the price target for RBLX shares?
Roblox has an average buying consensus rating based on eight purchases, seven holdings, and two sales allotted in the past three months. At $43, the average Roblox price target implies upside potential of 10.2%.
Take-Two Interactive
While Roblox makes a single platform that launches many games, including many from amateur game makers, Take-Two Interactive is known for its Rockstar Games Brand, which publishes the Grand Theft Auto series, among other things. The company also owns 2K Games, which publishes names like BioShock.
Take-Two Interactive has been profitable for a long time, although it missed earnings estimates for the most recently completed quarter, posting $0.71 per share on $1 billion in revenue. Those numbers compare to the consensus of $0.87 per share on $1.1 billion in revenue.
The company’s P/E stands at 83.7x, which is rich compared to Activision Blizzard and other profitable game makers such as Electronic Arts (EA). As a result, a neutral rating may be appropriate given the profitability but high P/E. The stock is down more than 30% year-to-date, but only 7% in the past month.
What is the price target for TTWO shares?
Take-Two Interactive has an average buy consensus rating based on 13 buy ratings, seven holding ratings and zero sales ratings awarded in the past three months. At $164.58, Take-Two Interactive’s average price target implies upside potential of 34.1%.
Activision Blizzard
The main point about Activision Blizzard is that a long position in the company is a bet that the Microsoft acquisition will go through. Microsoft plans to pay $95 a share for Activision Blizzard unless regulators block the deal, so the current price of less than $80 is quite attractive if the transaction closes.
Regulators in Saudi Arabia were the first to approve the deal, but Microsoft is far from done. Interestingly, the Xbox maker downplays Activision Blizzard’s game portfolio. In a recent filing, it told New Zealand regulators that the company does not produce “must-have games”.
Microsoft added that there is “nothing unique about the video games developed and published by Activision Blizzard.” Of course Grand Theft Auto and Call of Duty players would disagree, but time will tell whether regulators from other countries believe the argument.
Of course, the decisions of US, UK and European regulators can have major implications for decisions of other regulators around the world. The key question they need to answer is whether the acquisition will significantly reduce competition in the video game space so they can eventually allow it, block it, or force the two companies to divest some of their intellectual property in order for the deal to pass. to go. by means of.
With Activision stock trading so far below Microsoft’s $95 per share price, it appears the market expects regulators to block the transaction. Warren Buffett’s team seems to be anticipating the deal, however, as his Berkshire Hathaway (BRK.A) (BRK.B) recently strengthened its position in the stock.
What is the price target for ATVI stocks?
Activision Blizzard has an average buying consensus rating based on four buy, four hold and zero sell ratings awarded in the past three months. At $93.43, Activision Blizzard’s average price forecast implies upside potential of 18.8%.
Conclusion: Bearish on RBLX, Neutral on TTWO, Bullish on ATVI
Investors might view Roblox as the hippest of these three gambling stocks, at least in part because of its metaverse connection. After all, wouldn’t it make sense to grab stock in a company that plays in one of technology’s most exciting spaces? However, valuations and fundamentals make it clear that an optimistic view is appropriate for the tough Activision Blizzard, pending its acquisition by Microsoft. On the other hand, a neutral view is appropriate for Take-Two Interactive, while the money-losing Roblox deserves a bearish stance.
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