If the economy goes into a recession, video game stocks could be good defensive plays, a Wall Street analyst said Wednesday.
In a note to clients, BMO Capital Markets analyst Gerrick Johnson beat the drum for video game stocks Electronic Arts, Take-Two Interactive Software and Activision Blizzard.
"Video game stocks were deemed 'Covid winners' in 2020, then 'reopening losers' in 2021," Johnson said. "We think they could be 'recession winners' in 2022 for many of the same reasons they had been Covid winners two years ago."
Amid economic uncertainty, inflation, and high gas prices, people might do less traveling, eating out and other out-of-home activities, he said. If people spend more time at home, that could lead to more video game consumption, Johnson said. During the Covid-19 pandemic, consumers spent more on video games as they sheltered in place.
EA stock dropped 1% to close at 129.03 on the stock market today. Take-Two inched down to 128.60. Activision lost 0.5% to finish at 75.70.
Video Game Stocks Rebounding
"Video games are one of the lowest-cost forms of entertainment," Johnson said. "We think investors should revisit these 'Covid winners' and look at these stocks as areas of defense in a very uncertain economic environment."
Video game stocks have been on the rebound lately. IBD's Computer Software-Gaming industry group now ranks No. 83 out of 197 groups that IBD tracks. Six weeks ago, it ranked No. 172. News and rumors of mergers and acquisitions have boosted the group in recent weeks.
Among video game stocks, Johnson rates Activision, EA and Take-Two as outperform.
He is bullish on Electronic Arts because of its hit game "Apex Legends" as well as refreshed EA Sports games.
Fewer Opportunities For Take-Two
Take-Two has fewer near-term opportunities but should continue to do well with its core franchises, augmented by new titles like "Marvel's Midnight Suns," "The Quarry" and "Rollerdrome," he said. It also should get a lift from its recent acquisition of mobile games firm Zynga, Johnson said.
Although Microsoft is in the process of buying Activision, investors can still profit on the deal amid uncertainty about regulatory approval, he said.
"The stock trades almost $20 below its $95 (per-share) deal price, offering about +25% upside should the acquisition by Microsoft close by next June," Johnson said. "While we are not antitrust legal experts, we think there's a high likelihood the deal does close."
Even if the deal is scuttled, Activision stock likely has a floor in the low-50s range, he said. Plus, the company has solid go-it-alone prospects, he said.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
