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Gaming industry’s ‘glow has faded’ in post-COVID era: Analyst

CFRA Vice President of Equity Research John Freeman sits down with Yahoo Finance Live to break down Activision-Blizzard and Take-Two Interactive's earnings reports, how Microsoft's acquisition of Activision may weigh on the gaming industry, the competition between mobile and console gaming, and Google's ChatGPT competitor, Bard.

Video transcript

- Two of gaming's biggest names, Activision Blizzard and Take-Two Interactive, they dropped their latest earnings only moments ago after the bell. And for more, we're joined by CFRA Vice President of Equity Research John Freeman. John, thank you for being here today. First, Activision Blizzard, nice beat on net bookings 3 and 1/2 billion versus estimates of 3.1 billion, up 43% adjusted EPS. Nice beat. What's your takeaway-- your big takeaways from the report.

JOHN FREEMAN: Well, I was really surprised with Activision. I mean, clearly they're executing, you know, despite the potential distraction of the Microsoft acquisition. And, you know, "Call of Duty" is just an outstanding property. And they, you know, continue to-- it's what's really impressive. They continue-- it's over 20 years old. And they continue to find, you know, really compelling updates to it that, you know, drive user engagement, which drives obviously-- which drives revenue obviously. Video games, right, it's a little bit like landing-- landing at F-18 Hornet on an aircraft carrier at night in stormy seas. You know, this is a very hit-driven business. But you know, this was a pretty impressive beat on-- at least on the top line, no doubt.


- That is a very colorful description, as always, sir. You mention the acquisition, which it feels like we've been talking about for years. It has been more than a year. And "The New York Times" now reporting that Microsoft expects the UK to be even bigger problem and oppose that. What chance do you give this of actually coming to fruition?

JOHN FREEMAN: So it's kind of interesting. If I didn't know what the stock price was, I would say, oh, it's-- you know, they're going to have to make some concessions, but then it might be a little rough, but they should be able to pull it off. Yet, at the same time, the stock, I've never seen a differential-- the offer price was $95 a share. The stock is trading at $72. There's obviously a lot of smart money, a lot of investors betting that it's not, you know, the wisdom of crowds, right?

I mean, if you go by that, then it says that, you know, it looks like it's going to get blocked. And obviously the UK-- I mean, personally, I also cover Microsoft. I don't think this is the right acquisition for them. I understand why they're buying it. It's all about "Call of Duty," no doubt and the proto metaverse sort of. You know, that's what they want to sort of get their hands on. I understand that.

But I think that from a regulatory perspective, it really just adds, you know, additional scrutiny to Microsoft, which obviously, as a big tech member, has already got, you know, a fair amount of scrutiny. So I mean, I wouldn't mind them giving up on the acquisition. But, you know, obviously, they've made the commitment to do it. But you know, it seems like it's really-- the regulatory resistance is pretty heavy.

- And John, let's switch gears to Take-Two. Your forecast was a little bit light, seeing that [INAUDIBLE] at $5.2 billion to 5.25. Estimate was for higher, almost 5 and 1/2 billion. What are you seeing in this report? Anything that stands out to you?

JOHN FREEMAN: What stands out to me right now is-- and it's the thing I've been concerned of. I mean, I think the evaluation on quarters Take-Two, if you're a long-term patient investor, and you can ride the ups and downs of the video-driven video game industry, then I think it's a real-- I think shares are really attractive. But I am worried about, you know, the Zynga acquisition and the integration issues. This was, you know, not a merger of equals.

But, you know, it's a merger. It's a pretty significant organizational merger. Whenever you have that, you're going to have the risk of integration issues and business disruption. And, you know, maybe we're seeing that in the results here for Take-Two this quarter.

- So with the exception of "Call of Duty" and maybe a handful of other titles, how would you describe the gaming sector as we are beginning '23?

JOHN FREEMAN: So you know, obviously the glow of the heightened engagement that we saw post-COVID, that glow has faded. And now, you know-- now you're seeing the real, more generally hit-driven aspects of it. And some are hits, and some are not. So that-- you know, that's the dynamic that I think is going on.

But I also-- longer term, I really do have a lot of confidence in the more immersive-type games, the sort of what I call proto metaverse kind of games, like "Call of Duty," like "GTA" as well, you know. And we're seeing "GTA 6." It's coming down the pike soon. I'll be very interested to see what commentary Take-Two has on that, on their earnings call.

- I have to admit I'm not a gamer, but I used to work at a video game store, EB.

- Of course you did.

- Well, Electronics Boutique back in the mid '90s. That's how old I am. I'm just wondering, how levered are these companies to the console cycle as they have been historically?

JOHN FREEMAN: So they are less levered now. But this last console cycle did have an impact. I mean, obviously it was hitting with the wave, you know, released in 2020, obviously hitting concurrent with the COVID lockdown sort of surge in engagement. Take-Two-- both Take-Two and Activision are very leveraged. And I think Take-Two is more so. But you know, I think the console, you know, is still relevant. And it does bring that sort of immerse-- those types of really immersive games, the ones where, you know, that the real hardcore gamers really get into.

You know, I think that's still very real. You don't get that kind of immersive experience from a mobile game. You just don't yet. That's not in the cards right now.

- As you mentioned earlier, you do cover Microsoft. In news today, that Google says they're going to unveil Bard in the coming weeks. How significant is the Microsoft advantage? And how big a threat is it to search.?

JOHN FREEMAN: Well, I think it's a threat to search because obviously if Microsoft can use ChatGPT to take any sort of share, that's all upside for them. But really where I see Microsoft, where ChatGTP, I think, plays an even bigger role, potentially, is with integration with Office. Kind of think about it as autocomplete but for entire paragraphs and pages rather than just single words, right? That could be-- that's a tremendous-- potentially tremendous productivity helper.

So, you know, that's-- and that-- you know, Microsoft will find a way to monetize that, you know, over time. So I think that that's, you know-- that's really-- the integration of Microsoft Office, I think, is actually a bigger deal, at least in the short to mid-term.

- Well, hopefully we don't see that integration between among ChatGPT and "Call of Duty" or any of these other games. I don't even want to go there. Thank you for great insights. John Freeman, we'll speak to you soon.