Why Tech is the Big Bailout Winner

Today, we got a convincing signal that trillions of stimulus dollars are being diverted into one asset class – tech shares.

That’s right, even though main street has not participated in the V-shaped recovery that tech shares have basked in, tech’s profit engines have gotten through largely unscathed.

The earnings that have streamed out this week validate the big buying into tech shares and today’s price action was mouthwatering.

We had names like cloud communications platform Twilio (TWLO) rise 40% in one day, ride-sharing platform Lyft (LYFT) was up 21%, and Uber (UBER) another 11%.

Outperformance of 5% seemed pitiful today in an asset class that has gone truly parabolic.

Another sub-sector that can’t be held down is video games.

The rampant usage of video games dovetails nicely with the theme of tech companies who have triumphed the coronavirus.

There is nothing more like a stay-at-home stock than video game maker Electronic Arts (EA) who beat expectations during its March quarter.

The company reported adjusted earnings of $1.31 per share during its fiscal fourth quarter, topping consensus estimates at 97 cents a share.

Revenue also beat totaling $1.21 billion surpassing estimates by $.03 billion.

EA Sports has identified Apex Legends as their new growth asset and this free game is having a Fortnite-like growth effect.

Apex Legends was the most downloaded free-to-play game in 2019 on the PlayStation 4 system.

The full ramifications of Covid-19’s impact on EA’s business, operations, and financial results is hard to quantify for the long term and this has been a broad trend with many tech companies pulling annual guidance.

I can definitely say that the year 2020 is experiencing a video games renaissance.

On the downside, EA is heavy into sports video games, and cancellations of sports seasons and sporting events could impact results, given its popular sport simulation titles like FIFA and Madden NFL.

EA Sport’s competitor Activision Blizzard (ATVI) is positioned to reap the benefits by reimagining mainstay title Call of Duty Warzone and users have already hit 60 million players in just 2 months.

The result is accelerating momentum entering the second quarter from the dual tailwinds of strong execution and premium franchises following last year's increased investment.

With physical entertainment venues like movie theaters, live sports, and music venues closed, home entertainment services have pocketed the increased engagement.

Nintendo is another gaming company whose fourth-quarter profit soared 200% due to surging demand for its Switch game console, and that title Animal Crossing: New Horizons shifted a record 13.4 million units in its first six weeks.

Activision is riding other hit game franchises like World of Warcraft, Overwatch, and Candy Crush – to visit their roster of blockbuster games, please click here.

These blockbuster titles are carrying this subsector at a time when the magnifying glass is on them to provide the entertainment people crave at home.

Shares of EA and Activision Blizzard are overextended after huge run-ups and another gap up from better than expected earnings reports.

If there is a dip, then that would serve as an optimal entry point.

The lack of vaccine means that gaming will see elevated attention until there is a real health solution.

If there is a second wave that hits this fall, then pull the trigger on these video game stocks.

To visit Electronic Art’s website, please click here.