Here are top video game-related stock picks ahead of earnings: Jefferies

Published Tue, Oct 24 20174:55 PM EDT

Video game analysts at Jefferies are shifting their attention to major game releases ahead of third-quarter earnings. Entering the holiday season, Activision and Electronic Arts release highly-anticipated content, including new editions of Call of Duty and Star Wars Battlefront. "Video game stocks continue to rise with our coverage group up about 75 percent year to date on average," wrote Jefferies analyst Timothy O'Shea. "We expect structurally higher levels of profitability over time driven by robust opportunities to generate more in-game spending, as global audience sizes and user engagement trends continue to impress." The analyst discussed his outlook on each of the stocks, complete with specific company analysis and price target. Here are O'Shea's assessments of the two major video game stocks before earnings: 1. Activision ( ATVI ) "Despite being our top pick across the sector, sentiment remains the most mixed of the group with many buy side clients lowering their internal 2018 EPS projections below $3.00 / share (vs sell side consensus $2.54) based on concerns the ad business is taking longer to scale than originally anticipated. With that said, short interest remains low at ~2% (2.3 days to cover), reflecting the fact many investors remain supportive of the stock." "When we look 3-5 years out we believe ATVI will much larger and more profitable than today as those businesses are layered on top of the core, which itself is a very attractive business." The analyst has a buy rating on Activision as well as an $80 price target, 30 percent higher than the stock's close on Monday. 2. Electronic Arts ( EA ) "Since August, sentiment seemed to be among the most positive of any name in the group with investors confident EA is on a path to achieving 40% margin over time. Investors appreciated the more predictable nature of EA's sports franchises (which drop every year) and FIFA in particular appeared well positioned to benefit from the 2018 World Cup. Short interest of 1.5% seemingly reflects this positive sentiment." "As gamers continue to consolidate around fewer key titles like FIFA and Battlefield (which are operated as live services where gamers play for years at a time), it is absolutely not a surprise to see EA continue to reduce the number of titles under development." O'Shea has a $135 12-month price target on Electronic Arts, which is 19 percent higher than Monday's close.

Gamers participate in a video game at the E3 Electronic Entertainment Expo in Los Angeles, June 12, 2013.

Patrick T. Fallon | Bloomberg | Getty Images

Video game analysts at Jefferies are shifting their attention to major game releases ahead of third-quarter earnings.

Entering the holiday season, Activision and Electronic Arts release highly-anticipated content, including new editions of Call of Duty and Star Wars Battlefront.

"Video game stocks continue to rise with our coverage group up about 75 percent year to date on average," wrote Jefferies analyst Timothy O'Shea. "We expect structurally higher levels of profitability over time driven by robust opportunities to generate more in-game spending, as global audience sizes and user engagement trends continue to impress."

The analyst discussed his outlook on each of the stocks, complete with specific company analysis and price target.

Here are O'Shea's assessments of the two major video game stocks before earnings: