Goldman Sachs Gets Bullish On Video Games And You Should Too

Even with tech stocks hitting fresh all time highs again this week, Wall Street isn’t slowing down with its long recommendations. On Monday, Goldman Sachs was out with an upgrade to shares of rivals Electronic Arts (NASDAQ: EA), Take-Two (NASDAQ: TTWO) and Activision Blizzard (NASDAQ: ATVI).

Analyst Michael Ng was out with a bullish view on the industry overall, noting the strong video game engagement trends that were visible all last year are likely to continue into 2021 while also pointing to exciting upcoming games visible in all of their pipelines.

Shares of the three titans were surprisingly muted despite the new bull in their camp, although much of yesterday’s session was dominated by the indice’s early pop to record highs which was followed by a fast and furious dip that had the tech heavy NASDAQ index temporarily fally close to 2.5%.

Leader Of The Pack

Of the three, Take-Two is by far and away the winner of the past 5 years, with its shares up more than 500%, compared to Activision’s 150% and EA’s 110%. While this lead has for the most part been eaten to, they’ve held that lead through the past twelve months during what will surely be regarded as one of the most seminal years for the video games industry. Having seen user numbers drop in the years before the COVID pandemic, this trend quickly reversed as an unplanned social experiment took place at an unprecedented scale. With non-essential businesses shut and more people than ever before working from home and living under lockdown, it didn’t take long for the dust to be blown off the old games console.

Monthly users numbers have been trending upwards every month since March which means there have been few better opportunities to be long video game stocks than this one. Morgan Stanley analyst Brian Nowak suggested last month that the pandemic has "pulled forward ~4 years of video game user growth."

Key factors like the release of new generation consoles from Playstation NYSE: SNE and Xbox NASDAQ: MSFT, mobile gaming, and the rise of online streaming and gameplay have combined with the pandemic to force a seismic shift in the video game landscape. We’re at the point where it’s almost unrecognizable from what many of us who grew up in the 1980s and 1990s first knew with our first generation, CD fed consoles. Total video game revenue from 2020 is estimated to be 20% higher than the previous year and close to 180%. This would make it a bigger industry than the film and global sports industries combined.

Room To The Upside

For all that though, EA has struggled to keep up with the other two in recent months, and suffered a cut to its rating by J.P.Morgan last month. It could be that it lacked a flagship online action game like Call of Duty from Activision or Grand Theft Auto from Take-Two, leaning instead on its soccer and football games which suffered a dip in popularity due to the underlying sports being cancelled for much of the past year in real life.

Still with a price target of $170, Goldman sees upside of at least 16% and plenty or room ahead for a fast growing industry. Ng also gave fresh price targets of $234 to Take-Two and $110 to Activision, suggesting investors getting involved now can look forward to upwards of 15% and 18% upside respectively.