The console cycle launch and the possibility of the first impacts of cloud gaming are among the top themes for gaming investors to watch in 2020, according to a note from Bank of America gaming analyst Ryan Gee.
Gee put out a list of seven top drivers/themes for the industry in the coming year.
"Buy in early," Gee says because gaming stocks tend to outperform in a console cycle launch period.
The fundamentals of the industry remain strong, with above-average revenue, margins and earnings trends against other sectors in the S&P 500.
Mobile gaming remains attractive, and, Gee said, growth will outpace consoles. "But secular tailwinds still favor consoles in 2020," he noted.
Don't Rely On Multiple Expansion
There's "little room for multiples," from here, Gee said. "Getting back to the 2017 peak levels requires a break-out hit or conviction the economics of gaming will improve dramatically through cloud gaming or other means."
Look For Hits
With prices still high and little room for them to go higher, stock performance will be driven by earnings growth, he said. And companies with the most new content are better-positioned to see positive revisions to estimates.
Gee's best propsects for new game hits: Ubisoft Entertainment SA, which is traded in France, (EPA:UBI), has five new games in 2020, and Activision Blizzard, Inc. (NASDAQ: ATVI), which has three or four new games. The most at-risk for troubles in this regard, Gee said: Electronic Arts Inc. (NASDAQ: EA), which has no new games set for release. Take-Two Interactive Software (NASDAQ: TTWO) has the least visibility.
Watch The Stream
Keep an eye on streaming. Cloud gaming and the release of Alphabet Inc.'s (NASDAQ: GOOGL)(NASDAQ: GOOG) Google Stadia has given the streaming space some traction and this part of the game world may finally be ready. Take-Two Interactive and Ubisoft are best positioned here, with the most content on Stadia.
Fortnite is still worth watching, "still the biggest game in town," Gee said. But revenues are down 40% year-over-year and this mega-trend game could be waning. "Fortnite impacted online games more than new game sales at its peak, so look for in-game revenues growth comps to improve," Gee said.