The novel coronavirus triggered lock-down has resulted in several changes in lifestyle. Some of these changes are likely to be permanent, witness the big shift toward online shopping. Similarly, we’ve seen an increase in demand for in-home entertainment services, underscored by growth in subscriptions for streaming services like Netflix (NASDAQ:NFLX).
Similarly, the video game industry has witnessed strong demand during the pandemic. A Deloitte survey a third of U.S. consumers have, “for the first time, subscribed to a video gaming service, used a cloud gaming service, or watched e-sports or a virtual sporting event.”
The World Economic Forum forecast that the global video game market will be worth $159 billion in fiscal year 2020. The market size is already four times Hollywood box-office revenue in 2019.
To be sure, there can be doubts on the growth of the industry after the pandemic. However, the boost to the video gaming market is expected to continue after the pandemic and social distancing end.
Given this outlook, it’s a good idea to hold video game stocks in the portfolio. This column will focus on four video game stocks that are worth considering:
- Activision Blizzard (NASDAQ:ATVI)
- Bilibili (NASDAQ:BILI)
- Electronic Arts (NASDAQ:EA)
- Landcadia Holdings II (NASDAQ:LCA)
4 Video Game Stocks: Activision Blizzard (ATVI)
With the demand for gaming, Activision Blizzard stock has moved higher by 36% year-to-date. Even after the gain, Piper Sandler has maintained an overweight rating on ATVI stock with a price target of $98. This would imply a 24% upside from current levels.
It’s worth noting that the company beat guidance for the second quarter of 2020. Call of Duty can continue to trigger higher-than-expected growth.
The total time spent in Call of Duty in Q2 2020 was eight times higher on a year-on-year basis. Given the consumer engagement, it’s very likely that the title will continue to deliver strong growth. In addition, the company’s World of Warcraft and Candy Crush have also been gaining momentum.
The next premium installment for Call of Duty is also due for release later this year. Management expects it to “be the largest and most engaged franchise player base at launch ever.” There are reasons to remain bullish from a growth perspective.
From a financial perspective, the company reported net cash of $3.8 billion as of end-June 2020. With a robust cash position and low leverage, the company is positioned to invest in innovation and reward shareholders.
ATVI stock currently has an annual dividend of 41 cents and I expect that payout to increase in the coming years.
Bilibili is another attractive name in the video game industry. In the last one year, BILI stock has surged by 208%. The stock is however worth keeping in the investment radar and buying on dips.
Bilibili is focused on China and has been rapidly expanding its user base. For Q2 2020, the company reported monthly active users of 172 million as compared to 110 million in Q2 2019.
The company’s gaming segment has delivered strong top-line growth as MAUs increase. For Q2 2020, gaming revenue increased by 36% on a YoY basis. With a strong pipeline of new games, I expect growth to sustain. The company currently has 11 games “that have acquired approvals and are scheduled to be released in the coming months.”
It is also venturing into e-sports through a three-year strategic partnership with Riot Games. China is the top market for e-sports and I expect this partnership to deliver results.
In addition to gaming, the company also derives revenue from advertising, e-commerce and value-added services. Presence in several high-growth businesses is also a reason to like BILI stock.
Overall, strong user addition and top-line growth is likely to continue for the company. China has a huge addressable market and the company is growing aggressively. A correction would make the stock attractive for fresh exposure.
Electronic Arts (EA)
Electronic Arts is also among the top video game stocks. EA stock currently trades at a price-to-earnings ratio of 18.6 and considering the growth outlook, valuations are attractive.
I believe that e-sports is likely to be a long-term value creator for the company. For Q1 2021, player acquisition in FIFA grew more than 100% on a YoY basis. FIFA Asia has also witnessed healthy growth. Player acquisition for Madden NFL 20 grew by 140% in Q1 2021 on a YoY basis.
With a cloud-based broadcasting platform, 85% more e-sports broadcast content at a global scale in the last four months than in 2019. Therefore, the e-sports addressable market is significant and Electronic Arts is well positioned to benefit.
Another growth trigger is that the company has a strong pipeline of new launches. For the current fiscal year, this includes FIFA 21, NHL 21, Star Wars: Squadrons, Rocket Arena and Madden NFL 21, among others. As these new games go live, top-line growth is likely to remain strong.
I also like Electronic Arts from a free cash flow perspective. In the last 12 months, the company delivered FCF of $1.4 billion. This provides ample scope for shareholder value creation. I would not be surprised if the company initiates dividends in the foreseeable future.
Landcadia Holdings II (LCA)
Landcadia Holdings is another interesting pick in the gaming industry. The SPAC surged to a high of $19.30 and currently trades at $11.62. The correction is a good opportunity to accumulate LCA stock.
In June 2020, the company announced the acquisition of Golden Nugget Online Gaming. The company has a leading position in New Jersey, which is the largest online gaming market in the U.S.
The company has aggressive growth plans for the sports betting and internet-gaming business. To put things into perspective, the company expects 2021 revenue at $122 million. Revenue is expected to increase to $625 million by 2025.
The company has already launched 19 exclusive games this year. Another 80 games are in the pipeline for the next 18 months. This is likely to result in strong revenue growth.
The possibility of more states allowing online casino gambling is another potential growth trigger for the company.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.