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Video games aren’t just for pale, sweaty nerds these days—they’re played by people from all walks of life, and they’re being played more than ever before.
The VanEck Vectors Gaming ETF BJK, +1.19% has gained 17% in 2019, while the S&P 500 SPX, -0.13% has gained 19% and the Dow Jones Industrial Average DJIA, -0.23% has gained 16%. Las Vegas Sands (NYSE:LVS) is the largest gambling stock in the world, with a market capitalization of $34 billion and an enterprise value of $45 billion.
Since the era of Pong and Atari, video games have risen from a tiny niche to one of the biggest sectors in the entertainment industry. Tech analytics company Digi-Capital estimates that global revenues from video game hardware and software could soar to $235 billion by 2022.
Naturally, these eye-popping figures also offer the opportunity for savvy investors to win big over the next several years. But what are the best gaming stocks to buy?
Are Gaming Stocks Worth Buying?
New Technology
Video games stand to benefit from technological developments like few other industries, making them a highly appealing option in the digital age.
Advances like virtual reality and augmented reality and better graphics cards allow users to fully immerse themselves in the game. Other new trends such as facial recognition, voice recognition, and gesture control provide a more interesting and interactive gaming experience.
Massive Growth Potential
With smartphones in billions of people’s hands around the world, everyone is a potential gamer. The rise of esports and video game streamers on platforms such as YouTube and Twitch show that people enjoy not only playing games, but watching and talking about them as well.
Video game companies that produce a captivating product can expect to win a loyal fan base, reaping additional revenue in the form of downloadable content (DLC), merchandise, expansion packs, and sequels.
Unpredictability
Like the film industry, the fate of a video game company often rises and falls on the success of its most recent releases—or even a single flagship product. Without the inside scoop on the development process, it’s sometimes difficult to ascertain how well a company’s next game will perform.
For example, Electronic Arts’ new video game Anthem hoped to capitalize on the popularity of recent multiplayer shooters such as Fortnite, Overwatch, and Apex Legends. However, since its release Anthem has mainly received middling and critical reviews, causing a significant setback for Electronic Arts [NASDAQ: EA].
Potential Regulation
The prospect of regulation constantly looms large over the video game industry. Chinese firm Tencent, the largest gaming company in the world, saw its shares plunge in August after China temporarily froze its approval process for new gaming licenses.
Even in the United States, there are recurring calls for regulation of violent imagery in video games, most recently by President Donald Trump.
There is also growing interest in regulating “microtransactions,” which are a business model that offers players advantages and better experiences in exchange for a small sum of money.
Is Activision Blizzard A Buy?
Activision Blizzard [NASDAQ: ATVI] hasn’t been having the greatest time lately. Although year-over-year revenues grew by 7% in 2018, the company’s stock also dropped by 26% in the same time period.
It’s little surprise, then, that the company laid off 800 employees in February, a full 8% of its workforce.
According to a report by Polygon, the Blizzard side of the business has no new major releases coming in 2019. The Activision side has also seen a slowdown, projecting fewer sales in 2019 than the previous year.
Despite the recent bad news, the restructuring at Activision Blizzard [NASDAQ: ATVI] may not be indicative of the company’s long-term outlook.
Most large enterprises in the video game industry go through similar events. However, would-be investors should certainly watch how engaged Activision Blizzard’s player base is with the company’s current and upcoming releases.
Should You Invest In Electronic Arts?
Electronic Arts [NASDAQ: EA] is another video game company that had a disappointing 2018, with shares cratering by 25%.
The recent flop of Anthem is another bad omen for the company, especially its BioWare division.
The good news for Electronic Arts [NASDAQ: EA], however, is that its recent Apex Legends title has been an unexpected smash hit, despite the lack of any announcement or marketing.
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In the immediate future, Apex Legends should be able to pick up the slack where Anthem has failed. Reliable cash cows, such as the sports franchises FIFA and Madden NFL, should also keep the company on its feet.
NetEase: Buy or Sell?
For investors looking abroad, NetEase [NASDAQ: NTES] is an intriguing choice.
NetEase [NASDAQ: NTES] is a Chinese Internet technology company that operates versions of Blizzard Entertainment games such as World of Warcraft, StarCraft II, and Overwatch for the Chinese market.
The company also produces its own games, such as the Westward Journey series.
Like Tencent, NetEase was affected by China’s gaming license freeze in August, with shares diving by roughly 20%.
However, the company has missed several recent investor expectations, and needs to demonstrate solid results in the near future.
As a spot of good news, NetEase subsidiary Kaola is set to merge with Amazon’s Chinese import subsidiary in the near future.
The Best Gaming Stocks To Buy: The Bottom Line
Activision Blizzard [NASDAQ: ATVI] is currently going through a patch of instability, making it a risky investment prospect for conservative-minded investors.
EA stock has been rallying since the start of the year, and could be a good choice for a quick buck but there are long-term concerns about the company’s performance.
The prospects of NetEase stock are negatively affected by the recent license freeze and concerns about a general slowdown in the Chinese economy. Like its partner Activision Blizzard, NetEase remains a risky buy.
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At the height of COVID-19, gaming stocks are making new highs. As the world is locked indoors due to the pandemic, more people are joining the gaming world.
While gaming stocks are typically not the type of high quality dividend growth stocks we cover on Sure Dividend, they have performed especially well as of late.
Gaming stocks like Zynga (ZNGA) and Activision Blizzard (ATVI) recovered from the March sell-off and rose more than 20% and 12% YTD (year-to-date), outperforming the S&P 500 Index, which fell 14%.
Welcome To The Lucrative World Of Gaming
Even before the pandemic, the video game industry was lucrative, growing 7.2% YoY (year-over-year) in 2019. Video games are gradually becoming the preferred form of entertainment. Data from Newzoo and Comscore shows that global video game revenue of $148.8 billion surpassed worldwide movie box office collection of $42.5 billion in 2019.
The significant change in the technology and business models of the gaming industry is driving growth. Video games have expanded beyond consoles to PCs and mobile. Thanks to high-speed internet, game developers have gone digital. Instead of buying video game packages, gamers can download games, subscribe to cloud gaming services, and make in-gaming purchases like new missions and player skins to enhance their gaming experience.
Similar to other physical sports, video games have sporting events called esports, where professional gamers compete in front of millions of viewers. According to Newzoo, 443 million people watched esports in 2019, and this number is expected to reach 495 million in 2020. The secret to succeeding in gaming is developing games that generate a loyal fan base for sequels, prequels, and merchandise goods.
2020 – A Good Year For Gaming
2020 is a good year for gaming stocks. We bring to you the top five NASDAQ gaming stocks which you should have in your portfolio. The stocks were selected based on their liquidity, growth, and fundamental strength.
Top Gaming Stock #1 – Activision Blizzard
Activision Blizzard is the world’s largest pure-play video game company with $6.5 billion in annual revenue and $51.8 billion market capitalization. It earns revenue by selling video games and services for game consoles (30%), PCs (26%), mobile devices (34%), and others (10%). Game services include in-game purchases and merchandise while the others segment includes proceeds from esports events.
Activision Blizzard has one of the most robust franchisee catalogs including World of Warcraft, Call of Duty, StarCraft and Bubble Witch, Diablo, and Overwatch. It earns 76% of its revenue from digital channels and 24% from retail and other sources. Activision Blizzard also broadcasts professional Overwatch matches on Disney’s (DIS)ABC networks, the Disney Channel, and ESPN.
In 2019, Activision Blizzard’s revenue fell 13.5% YoY, while its free cash flow rose 3.4% YoY to $1.7 billion. With a net cash position of ~$3.2 billion, it is well-placed to withstand the crisis and pay a dividend. The stock is making a new 52-week high of $67 amidst the pandemic.
Top Gaming Stock #2 – Electronic Arts
Electronic Arts (EA) is another video game giant with annual revenue of $5.5 billion and a market cap of $32.8 billion They offer games and services for consoles, mobile, and PC, and earn ~75% of revenue from digital channels. However, EA is more dominant in game console sales, earning 70% of its revenue from here. It earns 15% revenue each from PC and mobile games, and is witnessing increasing growth in mobile games.
EA has some of the best sports game franchises like Madden NFL, NCAA Football, NBA Live, and FIFA, and it is monetizing these games on esports. It also has an exclusive agreement with Disney for the rights of the Star Wars franchise. The franchisee licenses limit EA’s scope for merchandise sales. Its largest source of revenue is live services like in-game purchases, extra content, subscriptions, and esports. EA plans to monetize its games like Apex Legends and Battlefield through esports.
EA has a stronger cash position than Activision Blizzard. EA generates a higher free cash flow of $1.76 billion and has a more substantial net cash position of $4.6 billion. Its stock rose 5.7% YTD to its 52-week high of $114.47.
Top Gaming Stock #3 – Take-Two Interactive
Unlike EA and ATVI, Take-Two Interactive (TTWO) is a smaller player with estimated annual revenue of $3 billion and a market cap of $14 billion. However, similar to EA, Take-Two has a larger exposure to game consoles, which contribute to 85% of its revenue. It earns the remaining 15% revenue from PC and other platforms. It has less exposure to esports but has the potential to expand.
Take-Two’s biggest franchise Grand Theft Auto has the potential to become an esports game. Its other popular franchises include Red Dead Redemption, NBA 2K, and WWE 2K. Unlike EA that earns more than half its revenue from live services, Take-Two earns only 37% of its revenue from live services. Its major source of income is full game spending.
Take-Two Interactive is estimated to have a free cash flow of over $500 million and a net cash position of over $2 billion in fiscal 2020.
Top Gaming Stock #4 – Zynga
Another smaller player in the video game space is Zynga (ZNGA), which widely caters to the mobile platform. All its mobile games are free and it earns most of its revenue from in-game purchases and other live services. Some of its biggest franchisees are Mege Dragons, Empire & Puzzles, and Slots. It draws 90% of its revenue from mobile and 10% from advertising.
In 2019, Zynga’s revenue rose 46% YoY to $1.32 billion, and free cash flow rose 52.5% to $239 million. It has a net cash position of $790 million. Zynga is a high-growth stock increasing 21% YTD and has a market cap of $7.12 billion.
Top Gaming Stock #5 – NetEase
Adding to the above four American companies is Beijing-based NetEase (NTES), which develops PC and mobile games and also distributes games of Activision and Microsoft’s Mojang in China. NetEase largely caters to China, Japan, and other Southeast Asian markets. It has franchises like Westward Journey, Knives Out, and Identity V. Apart from gaming, it offers other online services like advertising, email, e-commerce, and music streaming.
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NetEase revenue rose 15% YoY to $8.4 billion and generated free cash flow of $1.95 billion in 2019. NTES stock rose 6.1% YTD and has a market cap of $46.2 billion.
Good Gaming Mix
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The above list is a mix of large players such as ATVI, EA, and NTES, high growth stock ZNGA, and a mid-cap stock TTWO. ATVI, EA, and TTWO peaked in Q3 2018 and then came crashing down as China froze gaming license approvals. These three stocks performed in line with the S&P 500 Index in 2019. Now, they are on a growth spree and have the potential to reach their 2018 levels as the covid situation, and regulatory environment works in their favor.
On the other hand, ZNGA and NTES outperformed the market in 2019 and see strong growth momentum in 2020 as well.