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Interactive Entertainment – Game Changer: A Deep Dive on Free-to-Play Console Games like Fortnite

— Timothy O’Shea, Jefferies U.S. Equity Research – Technology, Interactive Entertainment

Jefferies took a deep dive look at the “free to play” video game model and believes it will expand the market long-term but also presents uncertainty over the near-term. The $38 billion console video game market is accelerating, and Fortnite generated a record $2.4 billion in 2018 estimated revenues, proving free to play can drive superior results vs. the $60/game model. Notably, Jefferies estimates Fortnite’s EBIT margin could be 2,000 basis points better than ATVI or EA. Still, the firm notes that free to play games likely imply fewer, larger games. Jefferies believes the largest franchises such as Apex (EA), Call of Duty (ATVI), and Grand Theft Auto (TTWO) look best positioned. In addition, Jefferies highlights that ATVI trades near 4 year lows at 15.9x forward EPS and the company has Overwatch and Call of Duty that look well-positioned in light of the trends. FULL REPORT