Baird Equity’s Bullish on Activision

Baird Equity Research analyst Colin Sebastian sent out a report this morning to investors detailing predictions of the interactive entertainment sector in 2014 and offered a preview of several high profile companies' Q4 results. Sebastian said that the next phase of growth for the industry after a successful next-generation rollout during the holiday season is to survive the traditional Q1 lull the sector experiences every year.

"With plenty of cyclical risks still ahead, there is also an enormous opportunity if Sony and Microsoft can withstand the onslaught of mobile devices and the inevitable increase in living room competition from Apple and Google."

His firm predicts around 7 percent growth in interactive entertainment software (packaged and digital) in 2014 accelerating from flat sales in 2013. They also recommend that anyone playing the long game should back Activision. Sebastian also expects Q4 results to highlight the growing pains in the industry as the methods for delivering games continues to evolve and game makers transition from older platforms to newer ones.

"Q4 results will likely highlight transition period growing pains. Consistent with GameStop’s Holiday sales report, our checks suggest current-gen software sales remain under significant pressure, offset only in part by next-gen sales. Overall video game sector performance lagged the market during Q4 as investors await more tangible next-gen data points, and as such, we remain cautiously optimistic on the group."

Specifically they predict that Activision's Q4 results will show declining sales in Call of Duty and 2014 releases backloaded to September with the release of Destiny. EA will report strong sales of FIFA offsetting any slower reorder levels for Battlefield 4. While the swap of Titanfall into F2014 provides some added revenue visibility, we expect some cautious commentary from management on the selling environment. Finally, they predict that Take Two will say that it shipped more than 35 million units of GTA V during the fiscal year.

You can read the report here (PDF). Ultimately Baird rates Activision an "Outperform" and Take-Two and EA as "Neutral."

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