Shares of video game makers are in focus following a note from Morgan Stanley, in which analyst Brian Nowak said that the "tone" at this year's Electronic Entertainment Expo, or E3, was "much more muted" than it was at last year's event.

CLOUD GAMING AND CONSOLES: In a research note to investors earlier this morning, Morgan Stanley's Nowak said that a year after E3 2018, major game publishers' stocks are down 8%-40%, E3 investor attendance and interest in the sector "seemed down materially" and he left the event with six key trends and themes to monitor that he believes will be important to the publishers and gaming ecosystem over the next year. The analyst said that cloud gaming will be a major focus going forward, with Google Stadia (GOOG) and Microsoft's (MSFT) Project xCloud launching later this year in some capacity. Nowak said that more distribution alternatives are "positive" for publishers, and noted that other big tech firms are reportedly building cloud gaming products as well.

Still, the analyst pointed out that there will be another console cycle, as Microsoft will be releasing the next generation Xbox in 2020. With that in mind, the performance of the next generation of consoles will continue to be an important leading indicator for game sales in the second half of 2020 and beyond, Nowak added.

TAKE-TWO, EA, ACTIVISION: Nowak said in the note that from a micro perspective, Take-Two (TTWO) has the "cleanest" catalyst set, as the firm expects a large "Red Dead Online" content drop later this summer, "NBA 2K" has been a success with management remaining bullish on growth prospects, and the playable demo of "Borderlands 3" at E3 seemed positively received.

Looking to Activision Blizzard (ATVI), the analyst said that investor sentiment is low as the game maker needs new Blizzard intellectual property for 2020. Nowak also noted that "Call of Duty" digital monetization this year has higher uncertainty given the elimination of the season pass.

On Electronic Arts (EA), the Morgan Stanley analyst said he views the Season 2 battle pass for "Apex Legends" as "critical" for the game, given the mixed reviews for the first season. In addition, aside from the annual sports franchises, Nowak said he currently has low visibility into the fiscal 2021 release slate and believes that this pipeline uncertainty will remain an overhang, particularly because "Star Wars Jedi: Fallen Order," the company's major holiday release, does not currently include a live service component to drive earnings into FY21.

UBISOFT: Looking at Ubisoft (UBSFY), the analyst said that the French publisher's biggest upcoming title, "Ghost Recon: Breakpoint," was well received at E3 and the "robust" post-launch plans for the game could be an important driver should the game be successful. Nowak noted, though, that the other three big releases from Ubisoft this year, namely "Watch Dogs Legion," "Rainbow Six Quarantine," and "Gods & Monsters," raise some risk of cannibalization between titles.

Looking to the company's announcement of a PC subscription service called UPLAY+, Nowak said that it will be important to monitor the performance of the service as the roughly $15 per month subscription will need to offset the loss of $60 upfront unit sales.

PRICE ACTION: In afternoon trading, Activision Blizzard shares are 1.3% lower, EA shares are down 1.9%, Take-Two is down fractionally, and Ubisoft shares are 2.4% lower in New York amid a broadly down day for tech and related sectors.