EA down about 15% since I wrote this post wondering why EA had been so resilient to several bits of bad news. So, I'm kicking myself a little for not putting my money where my mouth was but I'm always very hesitant on betting that stocks will go down.
I am wondering about Titanfall now. I think it is probably the most anticipated of all next-gen games and with both consoles selling well things are looking good for this being the first "must have" next-gen game. The rather obvious fly in the ointment is that Titanfall is an Xbox One exclusive. Obviously this guarantees Microsoft's support but whatever deal they've done with EA I don't believe it makes up for Titanfall not being on PS4 too.
This seems particularly pertinent given that the PS4 appears to be much faster out of the blocks than the Xbox One (although I'm sure Microsoft will be hoping that Titanfall will change the balance).
As I laid out here EA remains on a relatively high valuation despite the recent drop so it is certainly possible that the success of Titanfall is in the price. While Titanfall will probably give EA some support going forward, it is difficult to be that bullish about EA given their very high p/e and disappointing recent track record in terms of execution.
Assuming they've been conservative in their forecasting they could well survive the lacklustre sales and technical issues of Battlefield 4 but until Titanfall (and the run up to it) there doesn't seem to be a compelling reason to think EA shares will rally unless they can surf any next-gen wave which builds up.
|Take Two||$16.6||$1,470m*||$3.6 eps*||$2,250m||4.6*||0.7*|
* this does NOT include the effect of the recent share re-purchase. Ratios will probably reduce by about 20% but full details still to come
** based on analyst forecasts - the company does give an official forecast
Some big changes in the valuations and ratios since September when I last looked at this with almost all the publishers now trading at lower valuations or (lower ratios) than when I last looked. However, there are some very different reasons behind this and it’s probably worth taking a quick look at all the individual companies before looking at them against each other.
EA has come off quite a bit since September in valuation terms without its profit/revenue forecasts changing. In fact there’s been a slight increase in their earnings forecast. The most likely cause for this weakening sentiment in EA is that the Battlefield 4 launch has been a little mixed both in terms of critical reception and sales. Current-gen sales are down very heavily and although it’s doing well on next-gen it hasn’t been the “must have” title for next-gen. There are also technical issues which don’t appear to be going away and EA have recently said they won’t be releasing any more DLC until these have been solved.
Titanfall (due in March) is still looking like it is going to be very strong and is probably the first true next-gen triple-A title. It’s a shame that it’s only for Xbox One (which looks like the weaker of the two consoles at launch) but I still expect it to have a very high tie ratio on release and the start of a new franchise for EA. Given that EA have failed miserably over the past few years to generate any new ip this is hugely important.
Having said all of that, EA is still valued very highly when compared to its peer group which is perhaps somewhat unjustified given their execution has been probably the poorest of any of the traditional publishers.
Looking at Take Two next and the numbers are staggering. Their forecast p/e is under 5 and that doesn’t include the effect of their recent share re-purchase which will bring that number down even further. Of course, this is their GTAV year and the market has resolutely decided to ignore this year in terms of earnings, revenue, cash generation and share buy-back. Arguably, Take Two haven’t helped themselves by not providing any sort of forward visibility beyond “we expect to always be profitable” but even so the situation is almost surreal.
Activision are a little bit the “steady-Eddie” of all the publishers with their annualised franchises (Call of Duty, Skylanders) and their World of Warcraft subscribers. And they are rewarded with a high valuation both in terms of p/e and p/sales. They have done a very nice bit of M&A (buying out their slightly troublesome major shareholder, Vivendi) but they mainly seem like a safe pair of hands. Of course, that’s relative to an incredibly volatile peer group but that seems to be their position.
Ubisoft are one of the big losers since September and that’s almost entirely down to shifting Watch_Dogs (I’m giving in and using the underscore) from this financial year to next and the ensuing profit warning. They’ve also moved The Crew and a few of their second tier franchises (Splinter Cell) fell under the wheels of the console transition but the main reason was delaying Watch_Dogs. In total contrast to Take Two they have already given profit forecasts for next financial year (and the one after!) which has probably supported the share price after their profit warning but they are still down significantly from the year’s high of over €12. Looking at their ratios then they remain on a very low price/sales valuation and, if they make their profit forecasts for the coming two years they are going to be on a p/e of well under 10.
Gameloft remains on a very high valuation, both in terms of price/sales and p/e. There’s quite a premium attached to the fact that they exclusively in the mobile arena and that has been seen as a much higher growth area than the traditional console market. Whether or not that view will persist is anybody’s guess but they need to grow their fundamentals rapidly to justify their valuation.
Zynga looks like an aberration which is being given the benefit of every doubt. The business that created it (social gaming on facebook) is diminishing and the move to mobile, or anything else, is really something of a gamble given they haven’t got the pedigree and track record. Nevertheless, the market is putting a lot of faith in Zynga as a recovery story which may prove to be misplaced.
When you look at the publishers against each other then the only 3 which are directly comparable are Activision, EA and Take Two. Ubisoft are traded on a different market (Euronext), Gameloft is also traded on Euronext and publishes only mobile and Zynga is a hybrid social gaming/mobile publishers.
However, you can still ascertain which of the publishers are viewed with a rosy future, which are viewed as a “wait and see” and which are just being ignored. And, as usual, if you think the market has got it wrong there is money to be made.
Now the new consoles have all launched internationally I thought it would be worth reviewing the winners and losers.
Starting at the bottom, without doubt the biggest loser is the Wii U. It has had a 12 month headstart over the PS4 and Xbox One so you’d be forgiven in thinking that it may take a little bit of time for the recently launched boxes to catch up.
Well, you’d be wrong.
It has taken the PS4 48 hours for its install base to soar past that of the Wii U in the UK. And in that statistic you probably have the winner too. Compared to the Xbox One, the smaller, cheaper PS4 which also plays current games slightly better is a healthy winner with its launch week beating the Xbox One launch week by just over 65% in the UK.
Although that isn’t totally surprising (given the number of self-inflicted bullet holes in Microsoft’s metaphorical feet) it is worth bearing in mind that the UK (along with the US) is a territory that has favoured the 360 over the PS3. So, the fact that PS4 has outsold the Xbox One in the UK is significant.
So, out the blocks, it’s a clear win for the PS4, with Xbox One behind but still going very strongly ….. and the Wii U is either asleep or dead. Perhaps, not surprisingly, early adopters liked the PS4 philosophy (a games machine) as opposed to the Xbox One (one box to rule them all). They liked the cheaper price (because you weren’t forced to buy a camera/Kinect). They liked the fact it was smaller. They liked the fact that Sony hadn’t changed their mind about what would and wouldn’t be allowed in the run up to the launch. And they probably liked the fact that, where there was a difference, the PS4 played games better than the Xbox One.
But I don’t think all is lost for Microsoft because after the initial purchase by early adopters, buying decisions will increasingly be led by games and Microsoft has more jewels than Sony in this department. The first truly exciting next-gen titles is an Xbox One exclusive and that’s “Titanfall” in March. At some point Halo will arrive for Xbox One and that’s another title which will drive sales.
Sony can point to “inFamous: Second Son” as a PS4 exclusive, also in March, but that doesn’t have anything like the anticipation of “Titanfall”. It may sell okay because there will be a PS4 install base desperate for some next-gen gaming but it won’t drive PS4 sales in the way that “Titanfall” probably will for Xbox One.
So, who’s the big winner so far from this generation? I’d say the big winners are the publishers and the retailers. Both Xbox One and PS4 have sold very strongly and the evidence is that that this generation will be as strong, if not stronger, than the previous. And that’s great for publishers.
And neither Sony nor Microsoft seem to have embraced the idea of moving consumers to digital purchasing so the threat of disintermediating the retailers has, in my view, receded.
To use the old cliché, it’s a marathon not a sprint, but the PS4 has clearly taken the early lead with the Xbox One slotting in behind. The Wii U has collapsed following a very false start and in the stands are the publishers and retailers cheering furiously.
So, Icahn (Take Two's biggest investor) has sold his shares to the company and his representatives have resigned from the Board. Despite, or maybe because of, the stock price being down nearly 6% on the news I feel an enormous sense of relief. I view Icahn's involvement as an enormous distraction with endless speculation about what he will do, won't do, should do, might be doing. Every time the price went down people wondered if he was selling, every time it went up people wondered if he was buying more.
It is with genuine relief that Take Two stockholders no longer have to worry about the actions of Icahn. The knee-jerk reaction yesterday was the Sword of Damocles hanging over the head of Take Two and no longer having to worry about when this particular hammer would fall is actually great news.
People have talked about how this means there's no (imminent) buyout of Take Two but there's no buyout premium in Take Two stock price. The company (ex-cash) is valued incredibly poorly. There not even a premium for the success of GTAV, never mind a premium for a possible buyout. So it doesn't seem there's any buyout premium to unwind.
I also have to say that I have been unimpressed with Icahn's "activist" investor stance. The one really significant (and correct) criticism of the Take Two Board is that they are enriching themselves at the expense of their stockholders by granting themselves huge option positions and diluting existing stockholders. Did any of that taper off while Icahn was involved with Take Two? No. So the one thing that you would expect an activist stockholder to do he failed to do. Whether that was because his people (and family) were enjoying this enrichment we'll never know.
His distracting celebrity status is clearly illustrated by the fact that on the day that Take Two bought back about 20% of their own stock (i.e. increasing eps by 20%) and demonstrating faith and confidence in their own future, and cash position, all that anybody is talking about is Icahn's exit. Consequently, the stock is down nearly 6% whereas it should (on fundamentals) be up 20%. If that isn't a perfect example of why every Take Two stockholder should be relieved that he's gone then I don't know what is.
I am very encouraged to see Take Two buying back their own stock and with their big guns continuing to fire (GTAV, NBA) I wouldn't be surprise to see the remaining 3m shares authorized by their buyback announced at some point relatively soon.
This should be the story, and it's a shame that it isn't, but at least the Icahn distraction is now consigned to history and people can focus on the huge success of the underlying business.
Natixis have put out a(nother) buy note this morning with the same €14 price target. What I haven't seen before is how they think AC4 will make up 10m units this financial year which is 5m on current-gen, 4m on next-gen and 1m "digital".
That's a lot more on next-gen than I thought was possible but the 5m on current-gen now seems about right. So, can AC4 do 4m on next-gen? We'll have to wait and see but if there's a 10m install base by the end of Ubisoft's financial year (end of March) that means 40% of all next-gen buyers will have a copy of AC4.
That seems an impossible tie ratio to be honest but it will be worth keeping an eye on the data that will come out over the coming months to see if that seems remotely possible.
Ubisoft results and no change from what they said during the profit warnings. They stuck by their 10m units of AC4 which means that either sales are better than they appear to be or they're in denial or they don't feel they can sound a warning bell this close to their profit warning and so soon after launch.
Ubisoft results tonight and, in theory, there shouldn't be any surprises given the profit warnings was only a few weeks back and not a lot should have changed.
However, the one thing that has happened is that AC4 has been released and we have the first piece of sales information in the form of UK charts. Week 1 it undersold AC3 by 60%. Week 2 it was down 63% on week 1 (cf AC3 which was down 73%).
Now, if you take last year's 13m units sold then -60% would give current-gen sales of 5.2m. Estimating that next-gen could sell 10m units by the end of Ubi's financial year and that 1:4 people buy AC4 then that gives another 2.5m units bringing the total to 7.7m AC4.
Which is quite a long way from the 10m units that they talked about in the conference call following their profits warning.
Now, that is all extrapolated from once piece of sales data (UK sales in the first 2 week) but I don't have any reason to think that the UK would not be representative and I also have no reason to think that current-gen sales will accelerate as we move towards the holiday season over and above how AC3 did last year.
So, I don't know how conservative Ubisoft forecasting was for this year but it certainly looks like the numbers are going to be lower than anybody expected.
Does that matter? Well, in some ways current-gen sales are historic so it doesn't matter if they are down 20% or 80% because they will soon be close to 0%. However, what worries me more is cash. Ubisoft were forecasting that they would end the year with a zero cash balance (having burnt through €160m this year). If that figure assumes AC4 was going to sell 10m units and it only sells ~8m units then that's quite a big hole in their cash at a time when you'd really want plenty of cash to tide you over the transition.
It also raises questions about the strength of the AC franchise which are valid concerns although my personal belief is that you can't read anything into the numbers at the moment because every franchise is massively down on current-gen (Call of Duty down 50%, Battlefield down 70%).
The other concern is Watch_Dogs. By the time it comes out, current-gen sales are going to be very, very soft and there won't be the next-gen install base to make up for it. In some ways, it could be coming out at the worst possible time, the nadir for console sales in this console transition. That's a rather uncomfortable thought and would mean the slippage was far more significant than originally thought.
Put it all together and I'm very much of the view that the right way to play Ubisoft is to sit on the sidelines and see how things turn out for them. They haven't suddenly turned into a bad company but the world is changing around them and has made the waters far trickier for Ubisoft to navigate than was previously thought.
Take Two smh (shaking my head).
Was there ever a stock that was so hard to like as Take Two? Here's a company that has just produced blow-out results, exceeding very high expectations, has consistently produced the highest quality games over the past several years, played the console transition perfectly, put in place a mechanism to monetize its biggest franchise ..... and the stock market has just shrugged its shoulders and ignored it all.
And I mean ignored it all.
As I've said before, Take Two did not run up to the GTAV release (in comparison with other publishers) so there was nothing in the price for the expected GTAV release. Add onto that the fact that GTAV surpassed even the most bullish expectations. Add onto that the fact they are the only publisher to be able to hold their head high during this console transition. And none of it is in the price.
Why? Well, the two most probably reasons are recurring revenues and transparency.
In terms of recurring revenues then GTAV has been treated as an "exceptional profit", i.e one to ignore when valuing the company. The argument is that it's been 5 years since the last GTA and it may be 5 years until the next one so we can ignore it.
While there's a seed of truth in that argument (i.e. it's a fact that it has been 5 years since the last GTA), it has been accepted by the company that was a mistake. The belief that dlc would bridge the gap between 4 and 5 was an experiment which failed. So, there's no reason to believe it would be 5 years until the next GTA, i.e. why repeat a mistake. Prior to the GTA4->5 gap it was not 5 years between iterations so there's no reason to think that should happen again.
Then, there's GTA Online. It's also an experiment, and we don't know the outcome yet, but that should go some way between smoothing out the revenue bumps in the whole GTA franchise. Whether it smooths them out a bit or a lot is still unclear and it may be quite some time before there's enough data to form an opinion but it certainly shouldn't be ignored.
And lastly, on GTA there's GTAV PC and GTAV next-gen (and GTA Online PC/next-gen) which will probably hit next financial year as long as the install base on next-gen accelerates in the right way.
GTA has been proven to be stronger than ever, probably the premier franchise in the whole of videogaming (maybe the whole entertainment industry). It's not going to deliver every year in the way it has this year but to ignore it is just plain wrong.
Of course, I haven't mentioned Red Dead, NBA 2K, Bioshock, Borderlands, Civilization and the plethora of other ip because they aren't in the same league but they are franchises that any other publisher would be delighted to have in their stable.
The second issue is transparency and here I have some sympathy with those who criticize Take Two for their attitude. The only public pronouncement that Take-Two have made is that they expect "to be profitable" next year. That simply isn't good enough for most investors, it obviously isn't good enough for the market and it certainly isn't good enough for their stockholders. They absolutely have to do better than this because they are a company with lumpy, inconsistent earnings and they have to go "above and beyond" to satisfy investors.
Ubisoft have said what they expect to earn (as a minimum) in FY15 and FY16. EA and Activision have indicated they expect earnings to increase from this year. Everybody knows that Take Two won't earn what they have done this year but I would have expected them to be able to say it will surpass $1/share even given the uncertainty about next-gen.
That would provide a massive boost to investor confidence and if they can't say that then they are incompetent. If, with GTA, Read Dead, Bioshock, Borderlands, NBA, WWE, Mafia, Civilization as your ip you are unable to earn over $1/share then give the company to somebody who can. EA or ATVI management would be able to and with their valuations could buy the company out at a big premium to the current share price and have an accretive acquisition even with the poison pill that the current management team have introduced.
I believe that one way or another time is running out for the current management approach to transparency and, with it, the millstone round the neck of the stock price.
As we sit here on the eve of next-gen I thought I would give my thoughts before the new boxes finally arrive.
The first thought is that current-gen is dead. It has long been my prediction that GTAV would be the last hurrah for current-gen and that has proven to be spectacularly right. Madden, FIFA, Assassin's Creed, Battlefield and Call of Duty are all well down on last year's iterations and not by a little bit. According to the one piece of evidence we have (UK charts week 1 sales), FIFA was down 25%, Call of Duty was down 50%, Assassin's Creed was down 60% and Battlefield 69%.
If those declines are mirrored elsewhere in the world then that is a far more rapid death of current-gen then most were predicting and next-gen isn't going to fill the hole for this quarter. The importance of very strong sales of next-gen over the next 12 months, to make next holiday quarter strong could not be over-emphasised.
The second thing to say is that Sony have done everything right except one thing and Microsoft have done everything wrong apart from one thing. And the one thing is quite important which is the games. Beyond the initial excitement, games shift hardware and out the blocks neither console has a "must have" game which can drive sales.
However, down the track we have Titanfall, Destiny (and presumably Halo) for the Xbox One whereas Sony is conspicuously absent of any exciting next-gen exclusives. Sony really messed up the last generation by (amongst other things) not having enough must-have content and it does look a bit like they could do fall into the same trap again. This time round they have better hardware, better marketing, better sentiment towards them and better pricing. But without the games they could end up snatching defeat from the jaws of victory.
The Wii U has been a big disappointment sales-wise and it falls to the PS4 and Xbox One to carry the fight for console gaming. The potential is certainly there, the hardware provides a great platform, but we now have to wait and see what the publishers can come up with in terms of exciting new games, genres and concepts which are going to drive the industry forwards.
A chapter is certainly closing and we wait to see what the new chapter brings.
I've been thinking quite a bit about Take Two since the results and will post some general thoughts later on.
However, to you specific suggestion about when would be a good time to release GTAV on next-gen I probably come from a different position to you.
Although it's difficult to know for sure, my take is that current sales of GTAV aren't being affected at all by people holding off for a next-gen version. I think that sales back up that theory and so I don't think there's any real threat of people holding off buying GTAV on current-gen to hold off for the next-gen version.
In terms of version for other platforms (PC and next-gen) then I think there's a commercial perspective and a technical perspective.
From a technical perspective, we know that next-gen is much closer architecturally to PC than the current console versions so I would expect them to be developing both versions in parallel. And although the PC versions haven't been crappy ports in the past, the new engine has to be something which is going to be the ultimate technical platform for the next 6 or 7 years for both GTA and Red Dead.
So, if the PC version is a port of the next-gen console version then we may not see it for a little while. But if it's a port of the current-gen version (like previous GTA games for PC) then it could be appearing very soon, i.e. May/June of next year. Although it isn't going to sell anything like the console version it will still probably sell as much as most triple-A games do across all formats so it's not to be ignored.
From a commercial perspective, there's absolutely no point in releasing a next-gen version for console until the install base is higher and for that reason I think we may not see a GTA game on next-gen for at least 12 months even if it's technically ready. I believe that a very high percentage of people will re-buy the game for next-gen and if you've got 30m people willing to buy the game then there's not a lot of point doing that if there's only 10m consoles out there.
So, on next-gen, I wouldn't be expecting any sort of announcement until well into next year at the very earliest because even with a following wind I can't imagine the game coming out any time before October/November 2014. Possibly we'll see a PC version in Spring next year but even that probably wouldn't be announced until February time at the earliest.
The other thing to throw into the mix is GTA Online. They could conceivable release GTAO for PC/next-gen and not GTAV. To some extent GTAV has been a trojan horse to get people playing GTAO and if it turns out to be hugely popular then it may be an option for them to release GTAO separately to GTAV for different platforms. Whether that helps them from a technical perspective I'm not sure but it is worth bearing in mind that GTA is now a two-pronged attack in a way that it has never been before.
The outstanding success of GTAV has given Rockstar some problems but they're the sort of problems that you don't mind having. My only real worry is that with GTAV, GTAO, next-gen and Red Dead, Rockstar won't have the capacity to get themselves onto a reasonable development cycle. The GTA franchise has been massively mis-managed over the past 5 years (and I say that as a huge fan of Rockstar and cognoscente of the success of GTAV) and what I really want to see is that they've learnt from these mistakes and get GTA into a recurring, predictable revenue stream rather than a once in a blue moon earnings event that the market decides to ignore as a "exceptional profit".
Front Page Articles
- 30/Aug Front Page Articles
- 03/Aug Take Two Q1 2013 results
- 26/Jul Zynga Q2 2012 earnings
- 26/Jul Gameloft Q2 2012 sales up 35%
- 19/Jul Ubisoft Q1 2013 results
- 15/Jul NPD June - down 29% year on year
- 12/Jul UK May sales down 38%
- 03/Jul NPD in the spotlight
- 28/Jun Free2play (Free to Play)
- 27/Jun New publisher valuations
- 25/Jun Publisher valuations
- 15/Jun May 2012 sales - no cheer
- 05/Jun Wii U (just about) support more than one gamepad
- 01/Jun 2012 continuing to look very tough
- 22/May Take Two Q4 2012 results
In the forums
Next and Recent Releases
External News Feeds
- Nippon Ichi's The Witch and the Hundred Knight due in March
- Obsidian renames Project Eternity, releases a proper video
- Double Fine launching indie-backed Hack 'n' Slash in 2014
- Double Fine announces puzzle adventure Hack 'N' Slash
- Riot Games launches new API in open beta
- When tales wag the dog: How narrative can help or hurt your game
- EA among the Human Rights Campaign's "best places to work"
- Run away! Escape mechanics in RPGs
- Peggle 2 to receive Duel mode for free
- Get a Job: Robot Entertainment is looking for a visual FX artist
- Doom turns 20 today: Watch how it was made
- Company of Heroes 2 gets both paid and free DLC today
- Rethinking AI: A new approach to simulating characters
- And God said, 'Let there be Post Master'
- Free-to-play Family Guy game announced for iOS, Android
- Lucasfilm Games stars in first-ever studio postmortem at GDC 2014
- What lessons can be learned from LucasArts?
- PS4 claims 10% of Twitch traffic
- Hoax backwards compatibility hack could brick your Xbox One
- Doom retrospective