There's videogame upside, J.P. Morgan says, but downgrades Nintendo, Konami
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After a dispiriting 2022 for videogame stocks, J.P. Morgan is ready to see more appeal for the space as a potential recession looms and companies pursue structural growth - but it has a couple of downgrades on tap for particular names.
One is Nintendo (OTCPK:NTDOY) - cut to Neutral from Overweight, as there's no news on the horizon for an upgraded console.
"We expect Nintendo to be able to continue to generate steady cash flow in FY2023 onward," and the upcoming Super Mario Bros. animated film and a possible new game in the series may amount to short-term catalysts, analyst Haruka Mori said.
But those could provide just a temporary stock price rebound, and "until management announces next-generation hardware (which we do not expect until 2025 at the earliest), which we think is needed for valuations to rise, we expect the stock to be range-bound."
The firm also downgraded Konami (OTCPK:KNMCY) to Neutral from Overweight, saying its relative upside has declined. There's long-term high growth potential and the stock still seems attractive, though consensus estimates haven't fallen far enough to account for challenges to the company's eFootball 2023, Mori said.
Overall, a potential recession lead thoughts to videogames seeing solid demand as an inexpensive form of entertainment, however, and yet J.P. Morgan is emphasizing upside potential as more important than the space's defensive characteristics.
Capcom (OTCPK:CCOEY) has stable earnings, and like Nintendo (OTCPK:NTDOY) is seems to have downside support. But looking at potential catalysts and upside, Mori's sector favorite is Square Enix (OTCPK:SQNNY), followed by Bandai Namco (OTCPK:NCBDY), Sega Sammy (OTCPK:SGAMY), and then Nexon (OTCPK:NEXOY) - which J.P. Morgan is also upgrading to Overweight ahead of a release slate of "promising" new titles, including an entry from Embark Studio.
Other videogame competitors and ETFs: (SONY), (MSFT), (HEAR), (LOGI), (CRSR), (EA), (ATVI), (TTWO), (WBD), (OTCPK:UBSFY), (SKLZ), (SE), (NTES), (OTCPK:TCEHY), (RBLX), (GME), (GAMR), (ESPO), (NERD).
This week is expected to bring news of videogames' December sales; November sales logged their first growth in a year.