The video gaming industry has been on a roll in the past few years with record sales and a growing community of gamers that provide a burgeoning revenue opportunity.
U.S. consumer spending on video game products has topped US$56 billion in 2022 with no signs of slowing down. The rise in video game sales can be attributed to advancements in AI and virtual reality gaming, as well as the expansion of major media companies into the industry. These factors have fuelled increased consumer interest and propelled the growth of the market.
The following video gaming stocks provide exposure to a rapidly growing and innovating gaming industry. With ongoing advancements in technology and the digital transformation, the demand for video games is expected to remain on an upwards trajectory, offering promising investment opportunities.
One of the world’s largest video game publishers, Activision Blizzard’s (ATVI) franchise portfolio includes World of Warcraft (more than US$8 billion of lifetime sales), and Call of Duty (over 175 million copies).
The firm is well placed to maintain its industry dominance by developing compelling new versions of its existing franchises and by introducing new experiences, such as Overwatch. “We expect Activision to continue to benefit from ongoing console demand, the revitalization of PC gaming, and the growth in the mobile market via King,” says a Morningstar equity report.
While Activision Blizzard’s sale to Microsoft remains pending as a number of jurisdictions continue to scrutinize the deal, “we still expect the deal to close in 2023,” says Morningstar equity analyst Neil Macker, who puts the stock’s fair value at US$92, but cautions “the timing [of acquisition] may shift into the second half of the year due to the extended regulatory enquiries.”
The game publisher has taken advantage of the industry’s changing landscape, now split between big blockbuster games and smaller independent games. Macker forecasts 2023 will be a rebound year for the company and projects the firm’s annual revenue to grow 7% from 2023 to 2027, exceeding US$10.5 billion in 2027.
Chinese internet giant, Tencent (TCEHY) is the world’s largest video game vendor and owns the top-grossing mobile game–Honor of Kings. The company also owns and operates China’s largest social media super app, WeChat, which has entered every aspect of life in the country, ranging from social media to streaming games and videos, and ordering food and taxis.
Over the past decade, Tencent has successfully seized the opportunity presented by the industry’s shift towards mobile gaming. “The firm owns some of the world’s most popular titles, like Honor of Kings and PUBG Mobile,” says a Morningstar equity report.
To date, games remain Tencent’s primary source of monetization, with the segment accounting for more than 40% of the group’s operating income. “Tencent should continue to leverage its unrivaled access to user data and financial capital to create innovative, high-quality, and long-cycle games with a mobile-first approach,” says Morningstar equity analyst, Ivan Su, who pegs the stock’s fair value at US$90.
While games and advertising remain wide-moat Tencent’s primary cash flow generator, the firm’s investments in other areas such as cloud storage, business services, and enterprise software also offer long-term value-creation potential. “Given the size of China’s economy and the prevalence of digital adoption, we surmise that there are enormous opportunities ahead for enterprise technology, and Tencent will most likely turn these services into recurring revenue streams,” asserts Su.
Electronic Arts (EA) is the world’s largest third-party video game publishers and owns some of the most well-known video games. Some of its large franchises include Madden, FIFA, Battlefield, Apex Legends, Mass Effect, Dragon’s Age, and Need for Speed.
Over the years, EA has pivoted from a console-based video game publisher to the one of the largest publishers on consoles, PC, and mobile.
“Its portfolio of long-running successful franchises allows the firm to monetize its intellectual property year after year by delivering content via sequels, expansion packs, and downloadable content (DLC), exemplified by the annual versions of Madden (over 25 annual editions) and FIFA (over 20 annual editions),” says a Morningstar equity report.
The company’s franchises boast loyal user base, allowing it to push more of its content via direct digital channels thus sidestepping retailers, generating higher gross margins, and boosting returns on invested capital. “These franchises also create the opportunity to further monetize games via microtransactions,” says Macker, pointing out both the Madden and FIFA games include an Ultimate Team mode, a virtual card-collecting game.
The firm will consolidate its leading position by developing compelling new versions of its existing franchises, creating new ones like Apex Legends and acquiring established ones like F1 from Codemasters, notes Macker who pegs the stock’s fair value at US$142.