For this week's edition of "Game On," The Fly spoke with Wedbush Securities analyst Michael Pachter about a number of topics in the video game sector. In the interview, Pachter discussed the upcoming earnings season, Activision Blizzard's (ATVI) recent legal troubles, next-generation consoles, and more.
EARNINGS: When asked which of the "big three" U.S. game publishers, namely Activision, Electronic Arts (EA), and Take-Two (TTWO), will likely post the best quarterly results soon, Michael Pachter noted that Activision has a greater chance at surprising to the upside. “Activision had ‘Diablo II: Resurrected’ launch at the end of the quarter, so they’re probably going to surprise to the upside more than the others. ‘Candy Crush’ has also been killing it," Pachter said. "EA didn’t have anything special happen during the quarter, but they underpromised on their mobile acquisitions, so they’ll bring a little bit of upside. Take-Two really had nothing different from what they’ve had in prior September quarters. They launched a new ‘NBA 2K,’ but they always do. They had ‘GTA Online,’ but they always do. So there’s really nothing special. So I would say Take-Two has the least potential for upside, Activision has the greatest, and EA is in between.”
ACTIVISION: Activision Blizzard has recently been mired in controversy around allegations that it fostered a toxic and discriminatory workplace, with the state of California suing the game maker over a "sexist culture" and the U.S. Securities and Exchange Commission investigating the company over sexual harassment claims. Despite the publisher reaching a settlement agreement with the U.S. Equal Employment Opportunity Commission, the Wedbush analyst said he doesn't believe the company will fully resolve such discrimination claims. "As far as the sexual harassment stuff goes, they’ve fired around 20 people, including the president of Blizzard," Pachter said. "So I’m sure there will be more people who will be uncovered in the investigation who have harassed women and will be terminated. That’s probably going to linger for a while.”
“The settlement with the state [of California] will probably involve highlighting whatever employees were underpaid and making them whole," the analyst added, noting that more victims may come forward if the culture is as bad as the California lawsuit suggests. "So they’ll probably have to spend, and they only have about 2,000 women employees, probably there’s 200-500 people they underpaid. How much could that be? $100,000 each in back pay? If that’s 1,000 people, that’s $100M, and it probably won’t be 1,000 people. That’s a rounding error. I don’t think that’s going to weigh on the stock for very long. The sexual harassment is a bigger issue because it makes investors worry about whether the workplace is toxic. Underpaying women, I don’t think Activision is any different from any other company.”
“I don’t think investors care as much about sex discrimination [in terms of pay] as they do about sexual harassment," the analyst said.
CONSOLE SUPPLY ISSUES: Representatives from both Microsoft (MSFT) and Sony (SONY) have warned of continued supply issues for the Xbox Series X/S and PlayStation 5 due to a number of issues, including the ongoing chip shortage. Pachter said he's "far from an expert on the supply chain," but told The Fly that shipping will "probably clear up in the next three or four months." "But I couldn’t tell you how long it takes for semiconductor application to get back to normal, so I just don’t know,” he noted.
CROSS-GENERATION: The new generation of consoles is seeing more releases of so-called "cross generation" titles, or games that are compatible on both current-generation and previous-generation systems. Pachter noted that this prolonged period of games coming out on multiple console generations is likely due to the newer consoles not being quite as much of a jump technologically as in previous generations. “In the past, the reason for discontinuing new games for old consoles was that the build was a completely separate build, so it took two teams to build a game for two different kinds of tech," the analyst said. "I don’t think that’s true any longer. I think you can build a game and put it on PS4 and then upscale it for PS5, so the only reason to make a game exclusively for PS5 is you want to put all your resources into making it polished. But I just think that the two consoles are close enough, but the PS4 and PS5 and Xbox One and Xbox Series, that [games] can actually work on both. The law of diminishing returns [dictates that] they won’t spend money on the old-gen when they don’t perceive a lot of demand for the old-gen.”
“So I’d say the annual franchises, like ‘Madden,’ ‘FIFA,’ and ‘Call of Duty,’ will be on both generations for quite a while," Pachter added. "For franchises like Ubisoft's (UBSFY) ‘Assassin’s Creed,’ which doesn’t come out every year… the next ‘Far Cry’ will likely be next-gen only. [Ubisoft] will probably decide that it’s a hardcore game, and that those people will upgrade their consoles to buy new games. That’s not necessarily the case with ‘FIFA’ and ‘Call of Duty,’ which are not hardcore-only.”
SWITCH OLED: When asked if the OLED Edition of the Nintendo Switch (NTDOY), whose recent launch reportedly generated strong sales in Japan, can continue its sales momentum, the Wedbush analyst said the OLED version of the Switch will likely replace the standard Switch. “I think the Switch OLED is set up to be the standard crossover Switch, and I think that the Switch Lite will still be manufactured, and in a year or two the regular Switch will go away," Pachter said. "So I think the OLED is going to be the standard.”
“It’s like the iPhone," he noted. "They still make 11s and 12s when the 13 is out, but eventually they’ll discontinue the old models.”
"That said, nobody’s going to sell their old Switch to buy an OLED," Pachter added. "It doesn’t play any games any differently. The screen is a lot brighter, but all the software is identical. Sure, rich kids will buy a new one. It’s like if you have a 2020 model car. Are you going to buy the 2021 model? You can, but it’s not going to get you there any faster.”
"Game On" is The Fly's weekly recap of the stories powering up or beating down video game stocks.
