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Stock Strategist Industry Reports

EA and Activision Command the Console Cycle

These two moaty game developers have the established franchises and financial resources to benefit from the console cycle.

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 Electronic Arts (EA) and  Activision Blizzard (ATVI) have an opportunity to improve their competitive positioning when the next-generation consoles Xbox One and PlayStation 4 are launched this fall. The video game industry is increasingly driven by blockbuster titles, as demonstrated by the September release of Grand Theft Auto V. As the two largest publishers in the video game industry, EA and Activision possess the financial resources, intellectual property, and devoted fan bases to maintain leading positions and fortify their economic moats early in the console cycle.

In our view, EA and Activision Blizzard are the only two video game publishers with economic moats and are well positioned to increase sales, enhance profitability, and drive attractive returns on invested capital in the coming years. We believe Activision and EA can generate normalized free cash flows of roughly $1.3 billion and $400 million, respectively (7% and 5% yields at today's prices), which would put both firms in a strong position heading into the console cycle.

Carr Lanphier does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.