J.P. Morgan Neutral on Take-Two, maintains Activision rating seeing enticing risk/reward

J.P. Morgan initiated coverage on Take-Two Interactive Software (NASDAQ:TTWO) with a Neutral rating while remaining Overweight on Activision Blizzard (NASDAQ:ATVI) and Underweight on Electronic Arts (NASDAQ:EA).

The firm's analysts said that they see Activision with an enticing risk/reward but believe that potential upside in Electronic Arts or Take-Two is more of a 2024 item such that the firm has a less constructive stance on them for now.

Take-Two Interactive: The analysts said they like the firm's IP, conservative capital plan, and potential for longer-term industry consolidation such that they are comfortable with risk in the name.

However, the firm is held back from a more positive view as notable organic credit improvement is not likely to happen until the release of GTA VI at some point in fiscal 2025. Balance sheet improvements will be limited for now as the company focuses on IP investment and AAA gaming launches, according to the analysts.

In addition, the analysts expect the timing of larger consolidation potential to materialize not before year-end 2023. Relative value thus seems stretched at similar levels to those of Netflix (NFLX) and Omnicom Group (OMC) presently, and while the analysts like a swap versus Electronic Arts in the ~10-year bucket of the curve, they do not expect overall curve tightening.

Activision: The analysts still see a way ahead for Microsoft's (MSFT) acquisition of Activision.

Last week, the companies asked a federal judge to hold at least a five-day hearing on the Federal Trade Commission's request for a preliminary injunction to block the $69B videogame deal.

The analysts said they have been positively surprised by Microsoft's level of commitment to getting a deal done, and it appears that challenges in the U.S. and the U.K. are nearing some form of a resolution in the near-term.

However, the broader market is not so enthusiastic, and the analysts calculate implied deal probabilities at not over 20% across the curve based on current scenarios. The firm sees this as providing investors with an enticing risk/reward trade-off, which drives its Overweight rating.

Electronic Arts: The analysts noted their Underweight rating on Electronic Arts is based on a mixed backdrop, tight levels, and their view that spread upside is dependent on M&A activity.

The firm added that even though interest from higher-rated parties does offer a natural risk to its rating, the analysts think that any traction there will depend more on the Microsoft-Activision deal clearing so that higher-rated buyers may be encouraged to consider M&A discussions.

Thus tight levels hold the analysts back from a more constructive stance as they rather own Activision in the 2026-2031 bucket of the curve at similar levels or Meta Platforms (META) in the long-end at a discount.

More on Take-Two

• Microsoft Troubles Open Activision Investors To An Attractive Opportunity
• Take-Two Interactive - Interesting Case With Many Possibilities
• Electronic Arts: Great Business, But Too Expensive