Video Game Developers Face Lofty Expectations This Holiday Season

Video game developers such as Electronic Arts (EA) , Take-Two Interactive Software (TTWO) and Activision Blizzard (ATVI) have released a slew of new games ahead of the holiday season, and now face the challenge of meeting high expectations.

Holiday shoppers will likely be drawn to big-name shooting and sports games such as EA's "Battlefield 1," "Madden" and "FIFA" games, as well as Take-Two's "NBA 2k" games, said Mat Piscatella, U.S. gaming industry analyst at market research firm NPD Group.

Also of note, Activision Blizzard recently launched "Call of Duty: Infinite Warfare," "Call of Duty: Modern Warfare" remastered, "Destiny: Rise of Iron" and "World of Warcraft: Legion."

The excitement around the release of these titles pushed valuation multiples up to peak levels, BMO Capital analysts Gerrick Johnson and Tristan Thomas-Martin said in a note today.

Shares of video game makers have risen nearly 50% since February but are down an average 6% since October 24, according to BMO.

"There is little room for error," Johnson and Thomas-Martin said in this morning's note. "And since these major releases, video game stocks have seen their shares come under pressure. The moves have been exacerbated by a post-election rotation."

Of the three companies, Take-Two is most likely to outperform, given its "consistent release of creative content and the strength of its core franchises," the analysts contended.

EA's strong franchises should help protect the company against market uncertainty, while Activision Blizzard must contend with elevated investor expectations for upcoming releases, an aging core product portfolio and uncertainty about new eSports and entertainment business models, Johnson and Thomas-Martin noted.

"We expect to see more weakness in the video game space as we work through the holiday season," Johnson and Thomas-Martin said.

But data indicate that consumer interest in video games is holding strong compared to last year.

Console software sales in October were up 31% compared to a year ago, driven by last month's releases such as EA's "Battlefield 1," Hangar 13's "Mafia III" and Bethesda Softworks's "The Elder Scrolls V: Skyrim Special Edition," according to NPD data.

"We had a great October in the market," Piscatella said. "Whether that continues through the rest of the holiday is too early to call, but certainly good momentum from the October month."

November's performance will depend largely on sales this upcoming Black Friday weekend, he added, noting that new releases could again drive purchases.

Big releases so far this month include the "Call of Duty: Infinite Warfare" game and Nintendo's "Pokemon Sun and Moon."

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