More Action On Tap for Videogame Stocks -- Heard on the Street

Videogame players like action. Investors in videogame publishers may need to steel themselves up for some.

Over the past few years, the business of selling games has gone from "ship it and forget it" to one that never really powers down. Along the way, game publishers have effectively found new ways to make a buck. Expansion content, in-game items and in-game advertising are all growing areas of sales, allowing companies like Electronic Arts, Activision Blizzard and Take-Two Interactive to now generate the majority of their revenue through digital channels that offer higher profit margins.

That shows up results. EA reported fiscal year-end results Tuesday that showed revenue, once adjusted for items like deferred sales from online games, of more than $4.9 billion -- a record. Rising cash flow has enabled the company to buy back more than $1.5 billion in shares over the past two years, and it announced a new buyback of $1.2 billion on Tuesday. Activision last week reported a 32% gain in adjusted revenue for the March quarter, thanks mostly to digital sales at its Blizzard properties.

Investors have rewarded the sector well. Electronic Arts and Activision Blizzard have seen their market values surge nearly 50% over the past 12 months, compared with the Nasdaq Composite's 14% gain in that time. Take-Two Interactive is up nearly 90% in that time. That has left the three largest publishers with their highest valuations in more than five years, based on multiples to forward earnings.

That will likely make game stocks more volatile, with further gains harder won. But investors needn't unplug just yet. More big games are on the horizon, like the first sequel to the popular shooter game "Destiny" from Activision. But the release schedule of big hits can still swing by a lot. Take-Two has yet to say when a new "Grand Theft Auto" will arrive; the last was in 2013. Activision also needs this year's "Call of Duty" iteration to mount a comeback after last year's disappointed. Investors need to watch the big releases carefully because a flop could send shares down.

There are other positives, some clear and others more speculative. The emergence of new consoles like the Xbox "Project Scorpio" coming this fall should be less disruptive than past console transitions, given that the latest generation of machines is built on a more common computing platform. And nascent businesses like competitive gaming and virtual reality could offer up more opportunities down the road.

And even at their current valuations, the three publishers are trading in a range of 23 to 27 times forward earnings, which is only a small premium to the Nasdaq Composite's average of 22.4 times. There could still be a bonus life or two left in this game.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

May 09, 2017 17:48 ET (21:48 GMT)