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‘Star Wars’ May Help the Force Stay with Video Game Stocks

17 November 2015 in Trading Ideas

You may be aware that the seventh installment of a certain science-fiction movie franchise is opening next month.

If you’re not – where have you been??

On December 18, Star Wars: The Force Awakens will open across the US, and the expectations of some analysts are that it will give current box-office records a serious run.

At Fortune.com, contributor Scott Mendelson suggested that the film will bring in $125 million in its opening weekend on its way to an overall domestic gross of $517 million to $632 million. The upper end of that range would place the film at No. 5 on the all-time US box-office list.1

Mendelson added that the movie’s worldwide total could reach as high as $1.6 billion.

As huge as that take may be, however, there are scores of companies riding the film’s coattails with their own merchandising tie-ins.

Chief among those is video game maker Electronic Arts Inc. (NYSE:EA), which expects to sell as many as 13 million copies of its Star Wars Battlefront game when it goes on sale Tuesday, Nov. 17.2

The new title, as well as the company’s depth of overall offerings, was a key reason behind an outperform rating put on the stock in a recent note by Oppenheimer analysts Sean McGowan and Christopher Barnes, who called its franchises, which include FIFA, Madden Football, Star Wars, NBA Live, Battlefields and Need for Speed, “the envy of the industry.”3

The two analysts wrote that they expect EA’s sales growth to accelerate, following rising gross margins and tight cost management that have pushed operating margins to near record levels.

“A strong release slate in the coming quarters and favorable industry trends should drive profit outperformance. Although the shares have risen sharply this year, we see additional upside over the course of the next year,” they wrote.

Shares of Electronic Arts have risen more than 48% this year, as the sector has generally driven strong returns for longer-term investors.

The Online Gaming World motif has risen 40.5% in the past 12 months. In that same time, the S&P 500 is down 0.8%.

In the past month, the motif has increased 6.5%; the S&P 500 has gained 1.4%.

As a Barrons.com article recently pointed out, following years of stagnating sales and declining profitability, EA has followed a strategy for the past half-decade that calls for launching fewer but bigger and better-quality games, growing digital revenue and reducing costs.

The shift has apparently paid off, with McGowan and Barnes forecasting that the stock could rise another 15% even after already growing six-fold in the past three years.

But the game will face competition in the holiday sales period. Activision Blizzard, Inc. (NASDAQ:ATVI) announced Wednesday that the latest game in its just-released hugely popular Call of Duty franchise, Black Ops 3, racked up more than $550 million sold through to consumers worldwide in its first three days, according to a report by Investor’s Business Daily.4

Player engagement metrics also are up, the company said. Fans played more than 75 million hours online for “Black Ops 3” in its opening three days.

That performance came soon after another move by Activision applauded by many on Wall Street – its decision earlier this month to buy smaller rival King Digital Entertainment PLC (NYSE:KING) for $5.9 billion. Analysts at Argus subsequently raised their price target on the stock to $41 (it closed Friday at $34.59).5

Activision expects the acquisition to boost fiscal 2016 earnings by 30%.

Argus noted that the purchase shoots Activision into mobile casual gaming, the fastest-growing part of the video game business. Apart from the Candy Crush franchise that is King’s best-known title, Argus thinks that Activision is buying access to King’s strategic talent. King also should bolster Activision’s presence in the fast-growing Asia Pacific market, which is currently Activision’s weakest geographic segment.

Activision and Electronic Arts combine for a more than 43% weight in the Online Gaming World motif, while King Digital still comprises 7.5%. The long-term enthusiasm generated by Star Wars and Black Ops 3 should have a direct effect on whether the game sector can sustain a rally past the new year.

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1 Scott Mendelson, “’Star Wars: The Force Awakens’: The Realistic Box Office Prediction,” forbes.com, Sept. 18, 2015, http://www.forbes.com/sites/scottmendelson/2015/09/18/star-wars-the-force-awakens-the-realistic-box-office-prediction/, (accessed Nov. 15, 2015).
2 Jens Hansegard, “’Star Wars Battlefront’ Game to Launch,” wsj.com, Nov. 15, 2015.
3 Johanna Bennett, “Electronic Arts: Stock Could Climb 15% to $83, Says Oppenheimer,” barrons.com, Nov. 12, 2015.
4 Patrick Seitz, “Activision’s ‘Black Ops 3’ Comes Out With Guns Blazing,” investors.com, Nov. 11, 2015, http://news.investors.com/111115-780314-atvi-posts-big-numbers-for-call-of-duty-black-ops-3.htm?ven=yahoocp&src=aurlled&ven=yahoo, (accessed Nov. 15, 2015).
5 Chris Lange, “Why Key Analyst Sees Activision Blizzard Rising 20%,” 247wallstreet.com, Nov. 11, 2015, http://247wallst.com/technology-3/2015/11/11/why-key-analyst-sees-activision-blizzard-rising-20/, (accessed Nov. 15, 2015).