Game On: Activision Blizzard vs. Take-Two vs. EA

NEW YORK (TheStreet) -- Activision Blizzard (ATVI) reported after the bell Thursday, the last big name in the video game industry to do so. It was game on after Electronic Arts (EA) kicked off with next-gen game supremacy last week and Take-Two Interactive (TTWO) reported a massive surge in profitability on Monday.

The response to Activision's fourth-quarter has been positive, sending shares to a five-year high. By mid-afternoon, shares surged 14.5% to $19.66. EA and Take-Two came along for the ride, up 3.3% and 3.2%, respectively.

Despite a first-quarter outlook on the soft side, Activision's sales exceeded holiday season expectations on the back of its Call of Duty franchise. In the three months to December, Activision generated $2.27 billion in sales, higher than consensus of $2.22 billion according to Thomson Reuters­-surveyed analysts.

It was a stellar year for the video game company with its Activision Publishing subsidiary ranking as the number one console and handheld publisher in North America and Europe combined, with its second and third best-selling franchises Call of Duty and Skylanders.

Expectations are high for the Santa Monica-based company's next billion-dollar title, Destiny, set to launch in September.

"We have the strongest and most diverse pipeline of games in our history. In 2014, we expect these releases to enable us to grow non-GAAP revenues year over year and generate record non-GAAP earnings per share," said CEO Bobby Kotick in a statement.

Separate subsidiary Blizzard Entertainment's World of Warcraft retained its title as the number one subscription-based MMORPG (massively multiplayer online role-playing game) with a total 7.8 million subscribers.

"In our pipeline for 2014 and the next few years are at least three potentially groundbreaking new free-to-play franchises-Blizzard's Hearthstone: Heroes of Warcraft and Heroes of the Storm, and Activision Publishing's Call of Duty Online. We believe these games have great global potential," added Kotick.

Despite a full schedule of new releases, management guided first-quarter revenue of $675 million, below expectations of $687.4 million, and net income of 10 cents a share, a penny short of consensus. Full-year earnings of $1.26 a share is three cents under forecasts.

Where Activision has a full docket of upcoming products, Take-Two's pipeline is looking sparse and Wall Street took notice. Shares dove nearly 10% on Tuesday after New York-based Take-Two said it expects fourth-quarter earnings break-even to 10 cents a share, compared to analyst consensus of 13 cents. Forecast revenue between $170 million and $200 million is 44% to 34% lower than the year earlier.

At least the most recent quarter proved a triumph. In the three months to December, Take-Two managed to more than double profit on the release of its leaderboard game Grand Theft Auto V, a title that took five years from concept to completion.

Third-quarter net income of $210.7 million, or $1.70 a share, was 167% higher than the year-ago quarter, thanks to GTA V's success as it soared to the number one spot as the top-selling title of 2013 (even though it was released three-quarters into the year), according to NDP data.

The concern is that Take-Two mightn't be able to replicate its success with new products. Recently, Wedbush Securities downgraded the stock to "neutral" with a price target of $19 due to lack of visibility.

"We believe that investors should be cautious about the company's product pipeline; although Take-Two has consistently produced successful games, it has not produced a sufficient number of them to generate consistent profits," wrote analyst Michael Pachter in a research note.

As for Electronic Arts, its third-quarter sales were weighed down by the release of next-generation consoles, Sony's (SNE) PlayStation 4 and Microsoft's (MSFT) Xbox One, which threw a curveball to demand expectations.

"In the third quarter of fiscal year '14, we had the unprecedented excitement of two new game consoles launching within weeks of each other. With that came the challenge of launching a full slate of EA's top titles for both next-gen and the current-gen consoles," said CEO Andrew Wilson in a post-earnings conference call.

"Our Q3 revenue shortfall was driven by a much sharper decline than anticipated for demand," added CFO Blake J. Jorgensen.

In its December-ended quarter, the Redwood City, Calif.-based company reported sales of $1.57 billion, less than expectations of $1.66 billion.

NPD estimates U.S. sales of software for the PS3 and Xbox 360, older-generation consoles, dropped 35% over the holiday season compared to a year earlier.

However, higher demand for next-gen games at least partially offset weakness. Over December, The Sims creator managed to carve out an early leadership position among next-generation gamers, achieving 40% segment share on the PlayStation 4 and 30% segment share on the Xbox One in the U.S.

Must Read: Current-Generation Sales Prove Taxing for Electronic Arts (EA)

Must Read: Take-Two (TTWO) Falls Despite Posting Record Earnings

Must Watch: Grand Theft Auto Win Can't Save Take-Two From Poor 4Q Guidance

TheStreet Ratings team rates ACTIVISION BLIZZARD INC as a Buy with a ratings score of B. The team has this to say about their recommendation:

"We rate ACTIVISION BLIZZARD INC (ATVI) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

TheStreet Ratings team rates ELECTRONIC ARTS INC as a Hold with a ratings score of C. The team has this to say about their recommendation:

"We rate ELECTRONIC ARTS INC (EA) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, EA's share price has jumped by 72.61%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • Net operating cash flow has significantly increased by 88.70% to $685.00 million when compared to the same quarter last year. In addition, ELECTRONIC ARTS INC has also vastly surpassed the industry average cash flow growth rate of 0.67%.
  • ELECTRONIC ARTS INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ELECTRONIC ARTS INC increased its bottom line by earning $0.32 versus $0.21 in the prior year. This year, the market expects an improvement in earnings ($1.30 versus $0.32).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Software industry and the overall market, ELECTRONIC ARTS INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Software industry. The net income has significantly decreased by 584.4% when compared to the same quarter one year ago, falling from -$45.00 million to -$308.00 million.

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