• “We view the $180 billion video games industry as the best structural growth opportunity in media, and rate both stocks Outperform, seeing them as oversold relative to their quality and growth potential,” the Bernstein analyst said.
• Growth of the metaverse could benefit the entire video game sector.

The $180 billion video game industry offers a growth opportunity for investors, according to a recent report from an analyst offering two stock picks.

The Video Game Analyst

Bernstein analyst Matti Littunen initiated coverage for Take-Two Interactive Software, Inc (TTWO) with an Overweight rating and a price target of $173. Littunen also initiated an Overweight rating on Electronic Arts Inc. (EA) with a price target of $157.

The Analyst Takeaways

Bernstein expanded its video game coverage, adding these two new names to its coverage list. “We view the $180 billion video games industry as the best structural growth opportunity in media, and rate both stocks Outperform, seeing them as oversold relative to their quality and growth potential,” Littunen said.

Littunen said that these two companies have grown up in a sector that hasn't. “It’s set to benefit from decades-long demographic dividend even in its most saturated markets, retains pricing power due to its low product cost per hour of entertainment.”

The analyst sees the growth of the metaverse and increased digital distribution as keys to growth for both companies. “TTWO and EA look attractively priced compared to the pre-COVID level.”

Growth of the metaverse could benefit the entire video game sector, the analyst notes. “There’s no metaverse without video games: video game developers have been building metaverses since the '80s, and have the option of selling into an arms race between platforms or expanding their own direct consumer footprints.”

Electronic Arts

Littunen highlights the strong gross margins and return on invested capital for Electronic Arts. The company also pays a quarterly dividend and gets 70% of revenue from live services, Littunen noted. “While the company’s core sports franchises may be maturing outside mobile, we see growth from Sims and Sci-Fi,” Littunen said.

The analyst sees the strong franchises of Electronic Arts also getting some love from media companies looking to develop IP into shows and movies. “Both EA and Take-Two have strong, character and narrative-driven AAA IPs which could work well in film and TV adaptations.”

Take-Two

Littunen highlighted the strong pipeline of Take-Two and mentioned the company’s growth of additional franchises and diversification in mobile made it less reliant on the Grand Theft Auto franchise.

“TTWO knows how to do the tricky double act of keeping gamers happy and getting investors paid, with an uncompromised attitude to creativity generating 50%+ ROIC,” Littunen said. Littunen thinks the acquisition of Zynga Inc by Take-Two was “well-timed and structured.”

Take-Two has also taken steps forward in the media space with a “Bioshock” adaptation in the works for Netflix Inc (NFLX). “The company’s IP has perhaps more potential for film and TV adaptation than any other Western video game company,” noted Littunen.

Price Action

At Friday's close, Electronic Arts shares were up 3.52% to $128.09 and have traded between $117.58 and $148.93 over the last 52 weeks. Take-Two shares were up 3.71% to $136.41 and have traded between $131.37 and $195.82 over the last 52 weeks.