BofA names videogame picks in recession playbook
Alistair Berg

The post-Fed rate hike action in the stock market made for an end-of-week tumble, and an increasing conviction on the part of many market observers that a recession of some degree is ahead.
Those include BofA economists, who have forecast that aggressive Fed tightening is likely to push the U.S. economy into at least a mild recession in the first half of 2023 (a fate pushed back from the fourth quarter of 2022, the economists said).
And the bank's videogame industry analysts expect a recession to crimp game sales as it has in past crises, with consumers pulling back on discretionary spending. Game sales should fall by 4-6% throughout - more moderate than the 20% decline seen in 2009, in part due to a more mild recession and the diversification of the industry into live services and subscriptions in the intervening decade-plus.
But "we expect some players in the industry to outperform others, as certain product categories, franchises, and monetization strategies may weather through the economic storm better," analyst Omar Dessouky notes in a videogame/interactive media "recession playbook."
The bank used a four-quadrant framework to evaluate sector names on monetization and user acquisition. And that leads BofA to prefer PC/Console exposure over Mobile exposure, due to "monetization advantages (hardcore gamers, primary entertainment, immersive & social gameplay) and lower UA risks (dominant IPs, self-sufficient marketing via UGC/Social/DTC channels)."
Of the relative outperformers, its favorite in a recession scenario is Electronic Arts (NASDAQ:EA) - whose franchises are the "consumer staples" of videogaming, thanks to dominant branding and hardcore gamers. Titles like FIFA and Apex Legends should be more recession-resistant as gamers would be more likely to pull back spending on new-to-market titles vs. old favorites. And EA draws strength from a mix shift to live services as well as low exposure to casual mobile gaming.
It's also big on Roblox (NYSE:RBLX), set to benefit from counter-recessionary secular growth catalysts: innovative technology, along with new business lines like its "immersive ads." Spending of its young cohort should hold up, BofA says, and it's increasingly differentiated from traditional videogame due to its social function (similar to Meta and TikTok).
The bank also has a Buy rating on AppLovin (NASDAQ:APP), noting ad networks have a strong position in comparison with mobile gaming when it comes to an "otherwise challenging mobile ecosystem." It should see more revenue growth from initiatives including MoPub integration and AppLovin Exchange Header Bidding, BofA says.
It's more Neutral on Take-Two Interactive Software (NASDAQ:TTWO), which has some of the industry's best PC/Console franchises but a heavy 40% casual mobile mix. "Underperformance of the mobile segment could lead to downside surprises in a recession, with the success of Zynga integration an added unknown," BofA says, and a fuzzy slate combined with potential delays in Grand Theft Auto VI add to risk.
The biggest criticism in the recession playbook comes in for mobile publishers, who face substitution risk when customers pull back on entertainment spending. BofA has Underperform ratings on Playtika (PLTK), SciPlay (SCPL) and Playstudios (MYPS).