09/17/2020

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Video Game Stocks Filling the Entertainment Void



Big Wins Over Time for Console Producers and Game Publishers


With most Americans still stuck at home and delays in film releases and other entertainment options, there’s never been a better time to be in the video game industry. Research firms like IDC expect video game sales to hit $45.6 billion this year. That’s 19% growth for 2020, a year that has been harsh for many sectors of not only the media industry, but the economy at large. Gamemakers like Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO) have witnessed their stocks rise by almost a quarter as more gamers download, subscribe, and purchase their games.

Content providers haven’t been the only ones benefiting from the trend. In fact, industry leaders like Sony (SNE) and Microsoft (MSFT) saw an increase in sales even before the onset of the pandemic. About every six or seven years, the two companies release new consoles which have helped bring in new customers, better games, and rapid growth for hardware and software makers alike.

It’s possible to trace the rising stocks of video game publishers back to those launches. Taken together, Activision, Electronic Arts, and Take-Two’s stocks ballooned by a remarkable 1,700% over the past two decades. For comparison, the S&P 500 grew by 330% in that same time.

Looking Forward to Upcoming Launches


With that as a backdrop, it’s important to note both Microsoft and Sony plan to launch new video game consoles next month. Players and investors are already aware that there is an order backlog. When Microsoft launched pre-orders of its Xbox Series X and Sony did the same for the Playstation 5, the new consoles sold out within a day. Those who are lucky enough to get their hands on the new Playstation and Xbox will find faster load times, a better online experience, and improved graphics from a technology called “ray tracing,” which improves realism in computer graphics.

For the game publishers, the new launches justify a price bump. Instead of selling games for a standard $60, somewhere around 35% of new games will likely start selling for $70 by 2021. If this price point isn’t a deterrent, investors think this could push share prices even higher. Some analysts even expect the publishers to get higher multiples of forward earnings estimates than Apple (which gets 30 times earning estimates) as they release new games.

For Activision specifically, analysts say that having two new confirmed games in development should reassure investors that growth will continue. This stability—along with expected growth after Microsoft and Sony release their new consoles—could translate into Activision shares trading at a premium.

Mobile Gameplay Opens Up New Markets


While new consoles will likely help growth, Microsoft is also focusing on creating a subscription model and lowering the cost of entry. In November, it’ll be possible to play new Xbox games on older, less expensive machines for between $25 and $35 per month.

Mobile game sales also deserve their moment in the spotlight. As Activision, Electronic Arts, and Take-Two start to focus more on subscription and mobile gaming, their growth might become even more reliable. That’s because mobile sales don’t rely on expensive consoles. Instead, anyone with a smartphone can become a recurring customer.

“If you can play a game on 200 million consoles, that’s one thing, but if you can play a game on four to five billion smartphones, that’s a much bigger number,” said Dan Niles, a hedge fund manager who focuses on the tech industry. “That’s where things get interesting.”

Activision is a great example of a company that still relies on console games, but also sees a huge amount of revenue from mobile games. In 2016, they purchased King Digital, the company responsible for the very popular mobile game “Candy Crush.” In 2019, a third of Activision’s revenue came from games made by King Digital. Analysts only expect that kind of mobile growth to continue.


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