Stock analysis

Video Game Stocks Level Up to All-Time Highs

Shares of video game manufacturers have lifted to all-time highs, buoyed by a new generation of consoles, the promise of virtual reality gaming and the adaptation of many titles into competitive e-gaming that attracts pay-per-view revenue as well as full amphitheaters of paying spectators. Traditional demographics are also expanding, with rising female participation in this formerly male-dominated hobby. According to a 2016 study, more than 40% U.S. females have played video games, while a growing number of younger women are identifying themselves as “gamers.”

Alphabet Inc.’s (GOOG) Twitch portal has generated new marketing opportunities for video game companies to display their wares, with live streams of top players killing zombies and leveling up in classic titles as well as just-released entries. Product delivery through the cloud has added to impulse buying while eliminating long downloads or trips to the mall to pick up gaming discs, underpinning a booming industry that should grow well in the next decade. (See also: Investors May Love the Fast Action in Video Games.)

Electronic Arts Inc. (EA) stock entered a powerful uptrend in 1991 and continued to post new highs into 1993. A two-year consolidation pattern yielded a fresh breakout that reached $31.11 in December 1999. The stock sold off to $12.55 six months later, under pressure when the dotcom bubble burst, but that low held support while the broad tech universe got crushed. A series of higher lows into 2003 ground out an ascending triangle pattern, followed by a breakout that posted exceptional gains into the 2005 top at $71.16.

The stock carved a trading range into 2008 and broke down with world markets during the economic collapse, finally coming to rest at a nine-year low in the mid-teens in March 2009. A three-month bounce failed to attract sizable buying interest, generating a 2010 test at deep support, followed by a 2012 breakdown to a 13-year low at $10.77. The washout finally ended the long downtrend, giving way to a steady uptick that reached the 2005 high in 2015. (For more, see: Two Gaming Stocks on a Tear This Year.)

A nine-month pullback posted a higher 2016 low, followed by a bounce and July breakout that failed to gather momentum until February 2017, when the stock took off in powerful trend advance. The upside accelerated after a well-received May earnings report that triggered an eight-point gap, while price action since June has carved a modified cup and handle pattern, followed by this week’s breakout to an all-time high. A pullback to $115 should now offer a low-risk buying opportunity.

Activision Blizzard, Inc. (ATVI) struggled after coming public in 1993, stuck in a trading range bounded by resistance at $1.50. It broke out in 2001, entering a steady uptrend that generated six stock splits into the second half of 2008, when it topped out at $19.28 and sold off with world markets. Selling pressure ended in the single digits just six months later, but it took four years for the subsequent bounce to reach the 2008 high, yielding a breakout and uptrend that stalled in the upper $30s in December 2015. (See also: Analysts Bullish on Activision Blizzard.)

The stock carved a rising wedge pattern into 2017 and broke out once again, adding points at a rapid pace into May when it eased into another wedge. The uptrend added to a series of nominal new highs this week, but the shallow trajectory for Activision Blizzard suggests that its rival Electronic Arts will offer more profitable reward:risk in the coming months. That will change if Activision Blizzard bulls trigger a breakout above the rising trendline in the mid-$60s, allowing momentum to lift the price quickly into the $70s.

The Bottom Line

Electronic Arts and Activision Blizzard have carved strongly bullish patterns with heavy institutional sponsorship. However, neither stock has dropped below support at the 50-day exponential moving average (EMA) in 2017, adding risk if the broader market enters an intermediate correction. In the meantime, Electronic Arts looks like a better bet than Activision Blizzard, with a larger population of momentum buyers generating more profitable price rate of change. (For additional reading, check out: How to Game the Video Game Industry.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>