Privately-held Epic Games, maker of Fortnite – an apocalyptic survival video game, announced Aug. 14 it is suing Apple (NASDAQ:AAPL) and Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google. Epic Games claims both companies follow unfair payment practices in their app stores. The dispute puts the gaming industry in the limelight. Furthermore, Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) are expected to release next-generation gaming consoles. Therefore today, we’ll discuss three video game stocks for the fall blockbuster season.
According to research by Thomas Teeter and Ryan Lunsford of the University of the Incarnate Word in San Antonio, Texas, “…the rapidly evolving video game industry is becoming increasingly competitive as barriers to entry dissolve through digital distribution of products, independent game publication, and free to play video games.”
Developers live and die by the popularity of their titles and franchises. These companies must constantly update their offerings. Otherwise, players in general may not stay engaged. Thus revenue fluctuates based on future releases.
2020 brought another growth catalyst. Players had record levels of engagement with video games during the novel coronavirus outbreak as people stayed at home during lockdowns. While real-world sports leagues were disrupted, esports were not. Many existing and new players connected through esports and games.
Video gamers saw their share prices dip initially in March. Yet, since then, they have been steadily marching higher. Now, many are at 52-week highs. It is not easy to know how long this increased engagement will last. Now that the earnings season is mostly behind us, many investors are wondering if these shares can end the year on a much higher price.
With that background information, here are three video game stocks that are poised to benefit from greater demand for video games in the coming quarters.
- Activision Blizzard (NASDAQ:ATVI)
- Electronic Arts (NASDAQ:EA)
- Global X Video Games & Esports ETF (NASDAQ:HERO)
Video game stocks: Activision Blizzard (ATVI)
Santa Monica, California-based Activision Blizzard is one of the most important developers and publishers of interactive entertainment. Founded in 1979, the company holds the keys to some of the biggest video game franchises. It is also one of the largest gaming companies globally in terms of revenue and market cap.
On Aug. 4, the group released second-quarter results, which delighted the Street. GAAP revenue of $1.9 billion and GAAP EPS of 75 cents beat estimates handily. It saw strong year-over-year growth in reach, engagement and player investment.
The company operates three main segments:
- Activision, which produces franchises such as the ever-popular Call of Duty and Warzone, and focuses on console gaming.
- Blizzard, which produces franchises such as World of Warcraft, Ashes of Outland, and Overwatch and focuses on online PC games with an emphasis on subscription-based business models.
- King, which produces mobile games, such as Candy Crush.
So far in the year, ATVI stock is up more than 35%. In fact, on Aug. 6, it made an all-time high at $87.73. Activision’s share price is in general affected by holiday season shopping numbers. A recent investment thesis by Andrew Ravan at Johns Hopkins University concludes that “Q4 is historically ATVI’s strongest quarter – the holiday season brings in huge sales, as video games are bought on a large scale.”
Therefore, if there is short-term profit taking in Activision Blizzard stock in the coming weeks, long-term investors may regard that drop as opportunity to commit new capital into the shares. I’d look to buy ATVI around $75 or below.
Electronic Arts (EA)
As a leader in the video game industry, Electronic Arts develops and distributes esports games. Its top franchise titles include FIFA Online, SimCity, The Sims and Battlefield.
On July 30, it reported strong Q1 FY21 financial results, beating analysts’ estimates. For the quarter ended June 30, the company reported earnings per share of $1.25 on revenue of $1.46 billion for the first fiscal quarter, compared to EPS of $4.75 a share on revenue of $1.2 billion a year earlier. Last year’s net income included the impact of one-time tax benefits.
The big game publisher released two games during the quarter: Command & Conquer Remastered Collection and Burnout Paradise Remastered. It also delivered more than 30 updates for existing games.
“Player engagement through the first quarter was exceptionally high, and well above our forecast,” COO and CFO Blake Jorgensen said. “Our Stay Home, Play Together initiatives have been a strong tailwind for the business, as players look for safe and social entertainment in these difficult times.”
During the quarter, player acquisition for FIFA was up more than 100% year-over-year and up nearly 140% YoY in Madden NFL.
The company, founded in 1982, is highly innovative and profitable. And the company’s stock price is a testament to the approval by investors. Year-to-date, EA stock is up about 30%. Investors may consider buying the dips, especially if there is a dip toward the $125-level.
Global X Video Games & Esports ETF (HERO)
The Global X Video Games & Esports ETF invests in companies that develop or publish video games, facilitate the streaming and distribution of video gaming or esports content, own and operate within competitive esports leagues, or produce hardware used in video games and esports.
Therefore HERO, which follows the Solactive Video Games & Esports Index, gives investors access to a broad range of video game stocks. The fund’s top five holdings are Sea (NYSE:SE), Nvidia (NASDAQ:NVDA), Nintendo (OTCMKTS:NTDOY), Activision Blizzard, and Electronic Arts. The five firms make up around 30% of HERO’s net assets, which stand at $220 million.
Most gaming companies greatly benefited from the Covid-19 lockdown, as more people played video games. As a result, prices of ETFs in the sector benefited, too. Year-to-date, the fund is up more than 55%, hovering around $25.
The gaming industry is attracting a lot of interest and newcomers. Therefore, the risk of oversaturation is real as companies battle to capture play times. As a result, there will be occasional pull-backs in share prices as investors’ risk appetite ebbs and flows.
Any fall toward the $22-level would make HERO rather an attractive long-term play.
If a second-wave of the Covid-19 pandemic forces people to stay indoors, players will continue to go online.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.