It’s fair to say that gaming has had a pretty interesting year. It’s a market that has well and truly left the bedroom and become one of the largest industries in the world, worth more than music and film combined. With the pandemic shutting people indoors, console sales went through the roof, with many companies unable to manufacture their products fast enough to meet demand. This surge in demand was also met with supply-side issues that hampered production, including semiconductor shortages and the allure of crypto mining leading to a mass buy outs of graphics cards. The inability to buy games further increased demand and prices.
There’s obviously a lot of potential here for investors after the white-hot 2020, with markets expected to cool but stabilise for the coming year. Game investments are divided between direct players like Activison and EA who produce games, those who make games and consoles like Nintendo and Sony, and those who are partially exposed to the market through the manufacture of digital and physical platforms and components like Microsoft and Google. There is also the burgeoning industry of esports that remains highly volatile but with strong possibilities for massive growth.
Wider market considerations need to be made when taking buying positions, but these are our top picks for good long and short-term performers right now.
Nintendo ($NTDOY)
The Japanese video games giant looks set to close out the financial year with it’s four-year-old current generation offering on track to be the best selling console of all time. Nintendo has just released an action-packed end of year report and rumours of a new console on the horizon, it looks like the company could well sustain its growth.
Up until last month, stock was trading at 11% below YTD. That gap appears to have closed, suggesting confidence in the brand. While it’s possible the Nintendo Switch could rapidly fall out of favour as the Wii did, Nintendo appears to have learned the lessons of that console with sustained support for top-line games like The Legend of Zelda. The upcoming release of the long awaited sequel could very well be the push investors are waiting for.
Zynga Inc ($ZNGA)
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From humble beginnings with Facebook-integrated games like Farmville, Zynga has grown to dominate the US and Western mobile and social gaming scene. It is now the largest mobile gaming company in the US, with its online poker game and titles like Words With Friends remaining incredibly popular. Newzoo states that the largest segment of the gaming market belongs to smartphone games, at 43% and climbing, while console games hold only 29%. Therefore, it makes total sense to have investments in this space.
However, Zynga stock has seen a dip from itsFebruary high as investors move away from stay-at-home options. Zynga’s strategy for growth has always been in acquisition, buying up companies like Echtra Games and Peak, which has left it with a sizable debt in need of servicing. This could make some investors nervous, however Zynga are playing a longer-term strategy here and making smart business moves that could see it continue to further dominate the gaming space. It has posted just $2.2 billion in trailing 12-month revenue, a drop in the ocean of the $90 billion mobile gaming market. There is potential for serious long-term opportunities here.
Activision Blizzard ($ATVI)
Activision Blizzard is one of the biggest game publishers around and the brains behind the massive World of Warcraft and Call of Duty series. It has demonstrated an impressive history of being able to grow and support huge online communities around its titles and has been making more aggressive moves of late to enter the e-sports market. With the company running the Call of Duty and Overwatch leagues in a market that’s expected to grow 15% this year, it’s a strong contender to buy into.
This being said, the company has made 50 layoffs in the esports space recently, which it suggests is a simple restructuring measure and not a lean away from the arena. Couple this with slow growth expected across the at-home gaming sector in general this year and it could be a slow burn. However, Activision Blizzard board member Peter Nolan has been buying up stock in the company, a good indication of an insider seeing a relatively cheap offering with strong long-term performance indicators.
Roblox ($RBLX)
The video game company that allows users to build their own games with no coding experience holds an extremely strong market position over the children and teenagers market. The company recently went public in March of this year in a high profile IPO that added $15 million to its market cap in a single day. With massive growth this quarter from daily active users, it looks like a no-brainer buy.
However, Roblox benefitted hugely from the pandemic. With schools closed and many kids across the world being stuck at home, their parents were no doubt thankful for the company’s distractions. That’s unlikely to continue as the pandemic winds down. A key part of Roblox’s strategy is the continued expansion of its core audience to older age groups and investors seem doubtful the company can achieve this. Analysts believe the company has good prospects for the future, but that the initial valuation may have placed the company in an impossibly hard to justify price range.
Electronic Arts (EA)
The giants of the sports gaming industry, EA found its groove decades ago and continue to mine it to great success. With each passing year its business model appears to be a rinse-and-repeat approach to games like Madden, NBA, and FIFA. Not that this is necessarily a bad thing. EA has posted increased revenue year-on-year for over a decade and doesn’t look to be slowing down any time soon as it continues to capitalise on its rights to The Simpsons, The Sims, and Star Wars.
EA as a publisher is very much tied into the prospects of the gaming industry as a whole and as this space looks to continue to increase its share of the entertainment space, so does EA. It has also recently acquired mobile gaming firm Glu Mobile which is expected to increase its mobile gaming revenue by 60% as well as open up its international offerings as the company is fairly US-centric. Innovation however is not something that investors, or players, have come to expect from EA as the company is ruthlessly committed to return-on-investment (through the extensive implementation of microtransactions, for example) rather than creativity. That being said, it’s a tried and tested formula and we would expect the EA juggernaut to continue to rumble along smoothly.
Tencent ($TCEHY)
China’s answer to the Japanese and US heavyweights, Tencent is now the largest video game stock by revenue. Not only does it own and develop its own games, it also either owns outright or have large stakes in the companies that have created some of the most popular online games in recent years. Think League of Legends, Fortnite, and Clash of Clans. It also owns WeChat, making it a highly diversified company.
This being said, Tencent has been caught up in recent regulatory battles with the Chinese government and saw it’s stock price go into steady decline after a Bloomberg report found that the government was looking to establish a joint venture with the country’s top tech firms to gather user data. While prices have declined, Tencent outperformed its predicted forecasts for Q1 2021 with a revenue increase of 25% year-on-year. Tencent is also undertaking a huge acquisition strategy at the moment, attempting to outspend it’s local competitors. With big investments in high end gaming on the cards, it could be a great year for an already market-leading company.
InTheGame
If you want to hedge your exposure and get in on gaming in a wholesale fashion, eToro also offer its InTheGame portfolio. The custom portfolio created by eToro’s investment team comprises 26 different market leaders and closely aligned tech companies in the gaming space to maximise movements and spread in the industry.
It’s a great option for those who are bullish on gaming as a whole and want to expand their position to a broad range of companies in the space in a hassle-free way.
