Ubi : Potentially one of the best video game stocks of 2016 !

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Ubisoft: Potentially One Of The Best Video Game Stocks Of 2016
Jul. 8, 2015 4:10 PM ET

FY16 (end March 2016) is likely to be a transition year for the French video game publisher.
But FY17 could be huge as we expect Ubisoft to have an impressive lineup with the return of several franchises.
We estimate Ubisoft could grow revenues by 12-44% next year (depending on the release schedule) vs. consensus at +7%.
Ubisoft could be the most attractive video game stocks of 2016.

Electronic Arts (NASDAQ:EA), which we have long been highlighting as our top pick in the video games space, remains by far the sector’s best performing stock. After a more than 100% return last year, the stock is up 49% year-to-date.

While we remain confident in EA’s stock price potential over the next few quarters as its rich game lineup (« Star Wars Battlefront, » « Need For Speed, »etc.) will probably spark earnings upgrades, we believe it’s also worth starting to have a closer look at its French rival Ubisoft (OTCPK:UBSFY).

Ubisoft sold off following its initial FY16 guidance as its revenue outlook (flat growth) disappointed investors who expected more from a company operating in a double-digit growth environment. While the lack of revenue growth can easily be explained (« Watch Dogs » shipped 8m copies last year and won’t return this fiscal year), we believe that some investors also are concerned by the risk of slippage of two of this year’s major games, « Rainbow 6 » and another AAA title, that Ubisoft plans to ship in its last quarter.

This risk of slippage (and guidance cut) is real and we would view FY16 as a transition year for the company unlikely to attract many new investors. But as we get closer to FQ4 (January-March), this risk should dissipate and Ubisoft could appear as one of the most attractive video game stocks of 2016. Indeed, Ubisoft will face easy comps contrary to EA and, more importantly, will benefit from the launch of several high-potential titles.

While the annual installments in the « Assassin’s Creed » and « Just Dance » series are unlikely to surprise (we assume flat sales year-on-year), the potential « Watch Dogs 2 » (rumored to ship in June-July next year) is likely to sell much better than « Rainbow 6 » in view of the previous version’s shipments and to have a dramatic impact on group revenues. The 4m units differential we assume in our model (see below) would generate EUR160-200m ($175-220m) more revenue for Ubisoft, using a EUR40-50 ($44-55) ASP.

We also assume that Ubisoft will ship next fiscal year the two titles it recently unveiled, « Ghost Recon: Wildlands » and « For Honor, » and that they could sell around 3m copies each (in line or slightly higher than this year’s new IP « The Division » and another AAA title).

We have less visibility on the rest of the FY17 line-up but it’s pretty obvious that Ubisoft could release sequels of well-known intellectual properties such as « Far Cry » and « Splinter Cell. » « Far Cry 4 » was a major hit last year (8m copies) and is widely expected to return in the near future. The latest « Splinter Cell » shipped in 2013, so it wouldn’t be surprising to see a new episode soon.

In all, Ubisoft could ship, in a worst case, 4m more units in FY17 (thanks to « Watch Dogs 2 ») and, in a best case (« Far Cry 5 » and « Splinter Cell » are announced), 15m more units. This would represent a EUR180m ($197m) to EUR675m ($740m) revenue growth year-on-year, suggesting the current consensus revenue forecast for FY17 (EUR1.63bn/$1.78bn vs. EUR1.52bn/$1.66bn in FY16) is way too low.

This significant revenue and earnings upside potential is likely to make Ubisoft one of the top performing stocks in the video games space next year.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

*** Follow the link for the article AND AN INTERESTING TABLE, COMPARING 2016 AND 2017 LINE-UPS !!!****

http://seekingalpha.com/article/3312255-ubisoft-potentially-one-of-the-best-video-game-stocks-of-2016

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