One of the biggest trends in global entertainment is online video games. Based on the latest projections from Goldman Sachs, leading video game stocks have a long runway of growth ahead. Goldman analyst Michael Ng estimates the worldwide gaming market is worth about $135 billion and is growing at a high-single-digit pace, including PC, console and mobile revenue.
Gaming has been transitioning from offline to online for years now. However, Goldman estimates 30% of gaming still takes place offline, a lower-margin business than online. Mobile gaming, esports, streaming services, subscription models and penetration of the China market are all potential long-term bullish catalysts for gaming stocks.
Ng recently surveyed the gaming stock space, which has been red-hot in recent years. Here are the three gaming stocks where Goldman sees the most upside.
Gaming Stocks to Buy: Take-Two Interactive (TTWO)
Take-Two Interactive (NASDAQ:TTWO) stock tanked following the company’s third-quarter earnings report in early February despite putting up some impressive numbers. The CEO even said the company “crushed the quarter.” What gives?
Take-Two released Red Dead Redemption 2 in the third quarter. By almost any measure, the game was a huge success. Take-Two has sold 23 million copies of the game, making it one of the most successful launches in recent memory. The critical reviews of the game have been so good that it will likely have staying power as well. However, the market may have had expectations for the game that there’s simply no way it could live up to.
Ng recently said Red Dead Redemption 2 and its several anticipated expansions should continue to boost Take-Two’s bottom line in the near-term. In the longer-term, Ng said Grand Theft Auto VI will likely be released in fiscal 2022 or 2023 and drive at least $7 in earnings power for TTWO stock.
In the meantime, Ng said in-game monetization of NBA2K will offset declining unit sales. WWE2K revenue should also get a boost from new TV deals from World Wrestling Entertainment (NYSE: WWE). Despite the sell-off, Goldman has a “buy” rating and $130 price target for TTWO stock.
Like Take-Two, Activision-Blizzard (NASDAQ:ATVI) stock has taken a pounding in 2019, down 43% in the past six months. Activision also reported relatively strong fourth-quarter numbers last month. However, investors keyed in on what they saw as weak 2019 guidance. Activision also announced it would be cutting its global workforce in an effort to manage costs.
Like Red Dead Redemption, Activision’s smash hit Call of Duty: Black Ops was a huge success upon launch in October. Call of Duty drove double-digit quarter-over-quarter growth in Activision’s monthly active users in the fourth quarter, which grew to 53 million. PC sales of the game tripled those of the franchise’s previous installment, thanks in part to its “Blackout” battle royale mode. Battle royale games were the top trend in gaming in 2018, led by Fortnite and its $3 billion in profits.
While Activision likely has another major catalyst in 2021 with Diablo 4, it can also benefit in the meantime from monetization of Call of Duty. Ng said the game’s progression-based awards system and DLC available exclusively via passes will help drive revenue per user.
Without another major game release coming in 2019, Goldman has only a “neutral” rating for ATVI stock. However, after the recent sell-off, there is nearly 20% upside to Goldman’s $50 target.
Zynga (NASDAQ:ZNGA) is the fastest-growing mobile gaming platform in the world. Zynga ended 2018 at an annual bookings run-rate of $1 billion. But unlike Activision or Take-Two, Zynga has nine new game launches on the calendar over the next two years. Zynga’s so-called “bold beats” updates to its top franchises include “Legends” for CSR2, “Tile Styles” for Words With Friends and “World Poker Tour” for Zynga Poker.
These bold beats updates increase both player retention and player engagement, according to Ng.
In addition to the bold beats updates, Zynga has major new product launches piggy backing off of licensing deals with Game of Thrones, Harry Potter and Star Wars. New game launches are historically difficult and unpredictable. However, Ng said these new games could be the exception to the rule.
“Although we recognize the inherent difficulty in launching a successful mobile game, the content licenses and data-driven approach to marketing spend should help increase the likelihood of success,” Ng said.
Unlike Activision and Take-Two, ZNGA stock has been on fire in 2019, gaining 31% on the year. While the big run limits upside to Goldman’s $5.30 price target, Ng said Zynga has a potential buyout valuation of $6. At a market cap of just $4.4 billion and significant exposure to the fastest-growing segment of the gaming industry, it wouldn’t be surprising to see Apple (NASDAQ:AAPL) or another big company with cash to spend snatch up Zynga at some point in the near future.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.