Alphabet Inc’s (GOOGL) Stadia initiative marks the biggest event in the gaming world since Atari released the 2600 console in 1977. The subscription service will provide platform-independent cloud-based gaming that requires Google Chrome but no additional computer hardware, bypassing frame rate and resolution bottlenecks that have dictated PC and console development in the past four decades.
Stadia will require licensing from game developers, but Alphabet can increase income by owning content through the acquisition or one of more industry players. As it turns out, the sector has been under pressure for months and is currently trading at low prices and multiples, raising the prospect of a major speculative wave. It’s clear from price action that Wall Street hasn’t figured this out, offering potential buying opportunities for market timers and momentum players.
Electronic Arts Inc. (EA) stock is currently trading more than 35% below 2018’s all-time high at $151.26 and carries a forward price-to-earnings (P/E) ratio of 22. The stock topped out in the low $70s in 2005 following a multi-year uptrend and sold off to a 13-year low at $10.77 in 2012. The subsequent recovery wave completed a round trip into last decade’s high in 2015, ahead of a 2016 breakout that stalled above $150 in July 2018.
Shares of EA got pummeled in the second half of the year, dropping nearly 60 points to a two-year low in the $70s. The stock bounced to 200-day exponential moving average (EMA) resistance in the first quarter of 2019 and reversed, while accumulation-distribution readings continue to slump near four-year lows. The first wave of speculative activity should lift the price back above moving average resistance at $100, while subsequent buying activity may have a tough time mounting a major barrier above $120.
Activision Blizzard, Inc. (ATVI) stock is trading near a two-year low after the gaming company lowered 2019 guidance in February. The stock carries a forward P/E of 17.89. A multi-year uptrend stalled in the upper teens in 2008, ahead of a five-month decline that cut the stock price in half. It took more than five years for the subsequent bounce to reach the prior high, yielding a 2014 breakout that gathered momentum in 2015. It posted an all-time high at $84.68 in October 2018 and fell 45 points into February.
The stock is trading above the 50-day EMA for the first time since October, exhibiting modest strength, but it remains more than 10 points below the 200-day EMA. Accumulation has ticked higher since February’s deep low, but it will take major buying power for price to fill the November gap between $57 and $62. Given the technical challenge, accumulation indicators could provide more reliable directional clues than price action if speculators start to build positions in the coming weeks.
Take-Two Interactive Software, Inc. (TTWO) shares are trading near an 18-month low and carry a forward P/E of 19.33. A choppy uptrend ended near $30 in 2005, giving way to a two-legged decline that ended in the single digits in March 2009. The subsequent uptick reached the prior decade’s high in 2015, yielding an uptrend that generated the most prolific gains so far this century. The rally stalled near $130 in February 2018, ahead of a final wave that posted an all-time high at $139.91 on Oct. 1.
The stock fell to $100 in November and broke that psychological support level in February, dropping into the mid-$80s a few weeks later. It bounced back to new resistance and the 50-day EMA in March but hasn’t entered the unfilled gap between $100 and $107. The first wave of speculative activity could fill the big hole and reach 200-day EMA resistance while re-establishing a support base at $100. A rally above that moving average could generate even stronger buying interest.
The Bottom Line
Beaten-down gaming stocks could turn sharply higher in the coming months, fueled by speculation about acquisitions that will benefit Alphabet’s Stadia initiative.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.