Stock Market Comment: Gaming industry readies for a challenging year

• Global video games market expected to surpass $150 billion in 2019

• Industry's growth expected to slow in 2020

• Increased competition to accelerate M&A activity in the sector and squeeze margins

• Ubisoft (UBI.FR), Activision Blizzard (ATVI.US) and CD Projekt (CDR.Pl) with major titles scheduled for release in 2020

Gaming industry continues to grow and global video games revenue in 2019 is forecasted to surpass $150 billion for the first time in history. However, can this solid performance continued in 2020? In this commentary we will take a brief look at how the industry is forecasted to perform and what is expected from major companies.

Global gaming industry index (USGAME) rallied throughout the second half of 2019. Overall good performance of the global stock markets helped offset operational shortfalls of some index members. The index trades in an uncharted waters therefore it is hard to determine potential resistance levels. However, USGAME respected 42-point market geometry throughout the Q4 2019 therefore potential break below the 1235 pts could be considered the first major warning signal for bulls. Source: xStation5

Video games industry has changed a lot over the past decades. The industry has experienced tremendous growth as its revenue grew from around $40 billion in 2000 to almost $140 billion in 2018. 2019 is expected to be the first year when the industry generates over $150 billion in sales. Moreover, likes of its customers has changed as well as games for smartphones and tablets dethroned PC and console games as top revenue generating category. According to EY survey, sales growth is expected to continue over the following years but is also likely to slow to below 10% rate.

What do insiders say?

Not only market’s growth is forecasted to slow but also conducting business itself is expected to be harder. Executives of video game companies surveyed by EY expect to experience slower growth of gamers due to increased competition in the sector. Competition is also expected to continue to squeeze margins and bit into profits. Meanwhile, talent shortages cause companies to look more eagerly towards mergers. The M&A activity in the video game industry should continue to accelerate in the coming years. Almost half of surveyed executives said that they expect sales and marketing costs to rise by at least 10% over the next five years. As hurdles mount, margin of error gets smaller and it is crucial for companies to deliver on already-high market expectations.

Ubisoft

Ubisoft (UBI.FR) is one of the biggest game developers in Europe. The company is recovering from a major share price slump that occurred after the French firm issued a profit warning in October 2019. The stock dropped around 30% in a single day as two recently released games failed to live up to expectations. The company also decided to delay some big releases, including Tom Clancy’s Rainbow Six Quarantine (release expected between April 2020 and March 2021). The company is also expected to release a new title from Assassin’s Creed franchise in the final quarter of 2020. Market will focus on whether the company managed to balance in-game microtransactions - Ghost Recon Breakpoint drew criticism this year as gamers said it was more focused on microtransaction than gameplay.

Ubisoft (UBI.FR) managed to fully recover from October’s slump but still trades around 12% lower YTD. The stock is currently pulling back from the resistance zone marked by the lows from Q4 2018 and Q1 2019 as well as the 100-session moving average (red line). Should the pullback continue, reaction to the support at €56 will be crucial. Source: xStation5

Activision Blizzard

Activision Blizzard (ATVI.DE) gained around 26% this year meaning that it performed more or less in-line with the S&P 500 (US500). However, it should be noted that the company erased almost 50% of its value in the final quarter of 2018. Video game developer will release remastered version of its iconic Warcraft III game on January 28. This game is unlikely to be a major earnings driver but reception could be a short-term driver for share price. More important releases will take place in the second half of 2020 - Call of Duty: Black Ops 5 and World of Warcraft: Shadowlands. Those titles have a chance to revive revenue growth for the company as it waned this year due to lack of major releases. The company also announced Overwatch 2 and Diablo 4 during annual BlizzCon event but the games are still in development and are unlikely to be released next year. 

Activision Blizzard (ATVI.US) gained around 25% this year but still trades 40% below ATH reached at the turn of Q3 and Q4 2018. The stock nears the resistance zone marked by the 50% Fibo level of the share price slump from Q4 2018 as well as price reactions from mid-2017. The first event to watch for ATVI investors will take place on January 28, 2020 - release of Warcraft III: Reforged. Source: xStation5

CD Projekt

While CD Projekt (CDR.PL) is neither one of the largest, nor one of the most popular game producers, it has made its name due to the Witcher franchise. The Polish company is readying for release of the next game that it hopes will be a blockbuster - Cyberpunk 2077. The game is expected to be released on April 16 and hype surrounding the game helped CD Projekt rally over 80% this year. This is the only major title CD Projekt will release in 2020 therefore sales and reception of Cyberpunk will be crucial for stock’s performance next year. The company continues to reap profits from Witcher sales but these are slowing and CD Proejkt needs new earnings driver.

CD Projekt (CDR.PL) recovered from recent corrections and trades at fresh all-time highs. Trading on CDR.PL will be focused around “Cyberpunk 2077” in 2020 so investors should look for news on reception of the game as a hints. The nearest resistance zone ranges around the 280 PLN handle and is marked with 161.8% exterior retracement of downward correction from September and December. Source: xStation5