On The Fly: What To Watch In Video Game Sector Earnings Reports

Video game makers Electronic Arts  (EA) and Activision Blizzard  (ATVI) are scheduled to report quarterly results on August 2 and 4, respectively. Video game retailer GameStop  (GME) is expected to release its earnings report later this month. What to watch for:

1. CONSOLE, ONLINE GAMING MOMENTUM: Baird analyst Colin Sebastian told investors in a research note on June 16 that his thesis on the video gaming sector was positively reinforced by the Electronic Entertainment Expo, or E3 - the industry's biggest event. He said at the time that "healthy" core usage trends and improvements in hardware horsepower and evolving form factors should provide publishers with additional monetization channels. The analyst noted that his top picks, Electronic Arts and Activision, are "well positioned" for second half of the year strength given the "solid" holiday release slate.

2. MOBILE GAMING: On July 6, Pokemon Go made its debut in the U.S. and quickly became the number one free app in Apple's (AAPL) iTunes store, beating the record for more downloads in its first week than any other app in the store's history and putting the spotlight on mobile gaming. Several names in the video games space jumped on the heels of Pokemon Go's popularity. One of those names was Nintendo  (NTDOY) , which saw its stock almost double in the weeks following the launch. However, the stock gave back a large part of the gains as the company reminded investors that it does not own the game, which is a product of Niantic and The Pokemon Company.

3. GAME SOFTWARE SALES: Research firm NPD reported last month that sales of video game software plunged 31% in June, according to Piper Jaffray analyst Michael Olson. The sharp decline was due to a difficult comparison caused by the launch of Time Warner's (TWX) Batman Arkham Knight game in June 2015, Olson contended. However, the analyst saw the data as positive for Activision, Electronic Arts, and Take-Two  (TTWO) since it indicates their sales were beating expectations for the quarter. Moreover, Olson believes all three names will be boosted by the upcoming launch of a number of popular games.

4. STRETCHED VALUATION: Last Thursday, MKM Partners downgraded Activision to Neutral from Buy, saying the stock valuation seems "stretched" despite a higher second quarter and outlook attributable to Overwatch's success. Further, the analyst said investors are already pricing in a "beat and raise" quarter and may be "jumping the gun" on Activision's mobile advertising rollout for King Digital. Nonetheless, the analyst noted that he has a favorable view toward the company's long-term growth prospects.

5. DIVERSIFICATION: In a research note to investors today, Baird's Sebastian said that GameStop's acquisition of three AT&T  (T) authorized retailers is part of the Mobile/wireless segment expansion that the company had previously outlined. With Mobile as a key part of GameStop's diversification strategy, Sebastian noted that the store acquisitions are another step towards the company's goal of generating 50% of operating earnings from non-physical game sales by 2019.

Reporting by Jessica de Sa-Mota.

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