The Death of Video Games
A little melodramatic maybe? Okay, at least I have your attention. Let's go with... "The Slowdown of Video Games." Funny thing is that the most significant impact on the business of gaming has been for the most part... gaming. How's that? Recall, the Netflix (NFLX - Get Report) earnings call... the mention of Fortnite as the streaming giant's primary competition when asked about the field of competition already in and still headed toward that crowded business. You would think Netflix would have Amazon (AMZN - Get Report) Prime, Alphabet's (GOOGL - Get Report) YouTube, Hulu, or the coming of Disney (DIS - Get Report) Plus in their sight, but no, a video game was mentioned.
Take-Two Interactive Software (TTWO - Get Report) reported the firm's fiscal third quarter this (Wednesday) morning. The firm put to the tape adjusted EPS of $2.90, a dime beat on net bookings of $1.57 billion. This number not only beat consensus, it beat the firm's own guidance. Electronic Arts (EA - Get Report) reported on Tuesday night. That firm missed on revenue, suffering an 18% decline in sales. The difference there? TTWO's premier game... Red Dead Redemption 2 sold over 23 million units through the quarter, beating estimates. The lateral offering from EA, Battlefield V apparently under-performed. I conducted my own survey of two (I have two sons in their 20s), and was informed that the Red Dead series was very much a favorite while neither of them knew anyone still playing the Battlefield series. So, back to Fortnite... just what is the attraction?
Simply put, the game is free. Oh it does not stay free, but the developer, Epic Games allows for free game play. If I then understand correctly... players have options to purchase items that improve the experience, such as weapons, clothing, and the game's own currency. Heck, I'm not here to preview Fortnite for you. It's enough that the game, and it's special "Battle Royale" multi-player mode are addictive enough to scare purveyors of streaming entertainment, and force gaming stocks to reduce guidance going forward. Yes... reduced guidance.
Take-Two guided net bookings for the current quarter to $475 million. That's versus industry expectations that were above $600 million. The firm did raise full year guidance above it's own prior forecast, but still below what the industry was looking for. Electronic Arts also cut guidance, for your information. This has been a tough quarter for the entire industry. Already we have seen Activision Blizzard (ATVI - Get Report) react poorly to earnings as well as the loss of the Destiny franchise. On top of that Ubisoft (UBSFY) was down as well in Wednesday trade.
TTWO does not pay a dividend. In my opinion, this is the best name of the four across this industry that are mentioned in this article. Still, I don't like waiting for a firm to turn a negative looking chart without at least paying me some kind of dividend as a token of good faith while I wait.
The stock had appeared to force it's way out of the downward sloping Pitchfork model. I think that this morning's failure opens up an increased likelihood that the name trades as low as $90 at some point this quarter. I have no interest in the equity unless the name approaches that level, and if the firm will not pay me to wait, then the market will. For that reason, this is the only trade that makes sense for me today... (minimal lots)
- Sell one TTWO June $90 put (value: $7.25)
Note: this stand alone sale of one put raises revenue of $725 up front. If forced to eat the shares in June, the investor would run with a net basis of $82.50. Not really too bad, considering the last sale is now $93.81. Worst case, if this happens, the investor would turn around in June and sell a covered call against the equity position, further reducing this net basis.