Video gaming has come a long way since the introduction of Pong in the 1970s. Today’s gaming sector encompasses the most sophisticated aspects of technology, with new trends extending to e-sports, video streaming and multi-player experiences. Several MoneyShow.com contributors offer their favorite ideas for investors looking to play the video gaming space.
Jim Kelleher, Argus Research
The February 2016 acquisition of
Apart from the Candy Crush franchise, we think that Activision has gained access to King’s strategic talent. King should also bolster Activision's presence in the fast-growing Asia Pacific market, which is the company’s weakest geographic segment.
Activision is also focusing on broadening its video game audience, as demonstrated by its initiatives in downloadable content, e-sports tournament play, advertising, internet and television broadcasting and consumer products.
The company is also shifting its business strategy, first by extending game life and spurring engagement through periodic releases of additional downloadable content, and second by increasing digital revenue.
Activision is fighting the long-term secular decline in packaged games with increased online functionality. It is developing expanded, high-margin versions of its franchise games, developing “free-to-play” games for that growing market segment, and introducing new game concepts.
The shares have risen 75% on a total-return basis year-to-date compared to the S&P 500 17% gain; however, they have spent the last four months in a trading range in the low $60s.
The enterprise value/EBITDA multiple of 17.9 is near the peer median, though we believe that a higher multiple is warranted given Activision's leadership in the fragmented gaming sector.
In our view, Activision deserves to trade at a premium to peers based on the company’s industry leadership. The firm is well positioned for the holiday season and 2018. We are maintaining our Buy rating with a target price of $70 per share.
Tony Daltorio, Investors Alley Premium Digest
This digital age in which we live is literally changing everything — including when it comes to sports. Welcome the world of e-sports. This is a huge business that is growing rapidly. E-sports attracts serious gamers. There are tournaments where there is a $10 million+ top prize.
There are three main areas where e-sports can produce revenues. First are direct payments from live streaming services – some live tournaments have tens of millions of viewers. Last year, there were 11.1 billion e-sports videos streamed in China and 2.7 billion in North America, where about one-third of gamers reside.
The next source of revenue is the sale of content rights to broadcasters. Finally, advertising revenues, which today come largely from the gaming industry. But it isn’t hard to imagine a whole raft of companies looking to get their message in front of millions of viewers. That new reality is already beginning to unfold.
So how can you invest in this e-sports phenomenon? At the top of my buy list is
I believe CEO Bobby Kotick really understands the video gaming and e-sports better than rival CEOs. He sees e-sports as becoming more broad-based in its appeal in 2018 and I agree.
During the company’s latest earnings conference call, he said, “We view that (e-sports) as a major growth initiative and a very sizable standalone opportunity for the company.”
The company is already enjoying the growth in the general gaming industry with $1 billion from in-game (digital games) revenues in the last quarter. It currently has eight $1 billion franchises, including the very popular Call of Duty.
Not surprising then that Kotick raised the company’s guidance for the next quarter and that the stock is up nearly 75% year-to-date and almost 60% over the past year.
Next on the list is a rival of Activision, Take-Two Interactive Software, which is best known for its Grand Theft Auto franchise. Its stock soared nearly 10% after its recently released earnings report.
While trailing in the e-sports business, the company is finally moving ahead now. It inked a deal with the
Take-Two is also expanding rapidly into mobile games. It strengthened this area of the company with its acquisition of Barcelona-based Social Point for $250 million earlier this year. Social Point is one of the most prolific mobile games developers.
Again not surprisingly, Take-Two management also raised guidance for its next quarter. Its stock has even outperformed Activision with a 133% gain for the year so far and it has risen 140% over the past 12 months.
Glenn Rogers, Internet Wealth Builder
The video game industry seems to be in strong shape despite the thinking that console games and PC games would gradually fall out of favor as smartphones and watches gained popularity.
This happened to some extent for the last three years as games on smartphones have risen steadily in popularity. Although sales of some PC games and consoles are slightly down this year, overall they are still very strong.
The top five players in this group are
This year, $35 billion will be spent on video games software. Those sales are often spurred when there is a new console released by Sony, Microsoft or Nintendo.
Microsoft has released its new Xbox One X console, which offers increased power and 4K resolution. Nintendo has upgraded its consoles while Sony released new hardware last year.
The gaming industry and the movie industry have a lot in common. They are largely driven by new title releases and with the holidays coming up you can bet there will be lots of them on the way.
We’ve already had announcements of new installments of Activision's Call of Duty and Ubisoft’s Assassin’s Creed. Electronic Arts is releasing Star Wars Battlefront II. Nintendo has already released Super Mario Odyssey.
Additionally, clever publishers have found ways to facilitate in-game purchases and that is driving revenues in ways never before thought possible. These in-game purchases are coming in at much higher margins and in Activision’s case, they are now getting 80% of their sales from in-game services.
Additionally, they have created multi-player gaming platforms, which in Electronic Arts’ case brought in $800 million in revenue; then you have to add in mobile revenue, where EA took in $650 million last year.
All in all, the game publishers have been creative in expanding their offerings and therefore dragging in more revenue out of their major titles.
The other opportunity out there for both hardware and software is virtual reality. Still in its early stages, virtual reality promises an immersive experience that apparently greatly enhances the gamers’ experience.
Obviously, there are great opportunities for hardware manufacturers including chipmakers like Nvidia. Plus, all the handset folks are piling in and
Unlike content creators like newspapers, magazines, broadcast TV, etc., gaming has benefited from the online explosion. It is one entertainment segment that seems protected to some degree from the meltdown that other media companies have faced.
It has helped that these companies have also created live gaming contests, held in large, well-attended arenas where thousands of fans gather to watch pro players compete for big money.
So what should you do to take a stake now in this stable but still growing industry? The ETFMG Video Game Tech ETF — which is up 53% year to date — is a good place to start. Its portfolio includes many of the names I have mentioned.
However, the fund has limited exposure to Microsoft, Nvidia, and the major Chinese players like
Our action recommendation now is to buy the ETFMG Video Game Tech ETF for broad exposure to the gaming sector. If you want to enhance your position with individual stocks, consider adding Microsoft, Nvidia and Tencent to your portfolio.
Crista Huff, Cabot Undervalued Growth Stocks Advisor
New segments of the company have been growing rapidly, while the physical gaming business has been declining. The company is expected to earn $3.30 per share this year, making the price/earnings ratio just 5.6.
The stock is dirt cheap, and investors are simply waiting for some kind of catalyst that will bring stock market attention to the low price and huge dividend yield.
That catalyst could come from a product announcement or a good earnings report that continues to show growth in most business segments. The share price has greatly suffered while the company refocuses its business divisions away from a reliance on physical game revenue.
The P/E is just 5.5 and the dividend is huge, yielding 8.4%. The stock is greatly undervalued and the company is solidly profitable. I would caution, however, that the shares are not likely to rise much past $21 until at least January, when tax-loss selling season is behind us. Patient value investors and dividend investors should consider buying GameStop.
Steve Mauzy, High Yield Wealth
Bearish investors perceive GameStop as the next Blockbuster, which we recall went bust. Skeptics believe the video game retailer is vulnerable to the same fate as more video games move to digital format, or so the naysayers tell us. The sell thesis is tidy, but it’s not necessarily right.
We concede that GameStop’s largest profit driver, sales of pre-owned physical games, continues to wither. Pre-owned sales fell 5.1% last year; they fell 7.5% last quarter.
The pre-owned physical game business is withering and long-term the business will eventually die. In the interim, however, GameStop can continue to milk it for revenue and earnings.
GameStop recently launched an in-store rental service called PowerPass. A six-month subscription costs $60 and lets customers keep one free game after the subscription period ends.
Hardware sales, on the other hand, will survive. The business can’t be replicated in the digital world. And let’s not forget that GameStop is more than physical video games. It has diversified into collectibles. It has moved into mobile retailing.
GameStop is the largest authorized retailer of
With P/E multiple of 5, a dividend easily covered by earnings, and a 9% dividend yield, GameStop is cheap. We don’t think the business is doomed and we don’t think the stock will get much cheaper.
