Video game stocks are some of the best names on the market right now. Why? Well, for fiscal year 2020, global video game revenue is projected to be $179.7 billion. That revenue makes the industry a “bigger moneymaker than the global movie and North American sports industries combined.” Moreover, by fiscal year 2025, the world’s video game market is expected to reach $256.97 billion. Even the novel coronavirus pandemic has accelerated industry growth, making a lasting impact for years to come.
Given this growth outlook as well as industry tailwinds, I am bullish on video game stocks. On top of that, video game companies are also getting high scores on Wall Street this year — and for good reason. Analysts, in general, are bullish on these names and I expect them to trend higher in 2021.
So, here are the best four gaming stocks to buy for the upcoming year:
- Activision Blizzard (NASDAQ:ATVI)
- Electronic Arts (NASDAQ:EA)
- Take-Two Interactive (NASDAQ:TTWO)
- Zynga (NASDAQ:ZNGA)
Video Game Stocks to Buy: Activision Blizzard (ATVI)
ATVI stock has been trending higher through the last year. In fact, Morgan Stanley has rated Activision Blizzard as the top gaming pick for fiscal year 2021.
Furthermore, Baird has kept its Outperform rating for the stock with a raised price target of $116. That implies a 28% upside from current levels of about $9o. Baird analyst Colin Sebastian believes that a “majority of the incremental usage and engagement growth this year will sustain in 2021, benefiting each of the company’s core franchises.”
More specifically, for the third quarter of 2020, the company’s Activision revenue increased by 270% year-over-year (YOY). This growth was triggered in part by its popular Call of Duty: Modern Warfare and Call of Duty: Warzone titles. In addition, the launch of other games like Tony Hawk’s Pro Skater 1 + 2 has also boosted top-line growth. So, with 111 million monthly active users (MAUs), Activision will continue to drive growth for the company.
Additionally, in terms of growth potential, Call of Duty Mobile was the “highest grossing new game in U.S. app stores.” As of Q3 2020, the app was in its final stage of large-scale testing with more than 50 million players.
Finally, Activision is well-positioned from a financial perspective. As of Q3, the company reported net cash of $3.95 billion. So, it will likely remain free cash flow positive through the year. This will provide ample financial flexibility for deleveraging and investing in growth.
Therefore, it’s not surprising that Wall Street is bullish on ATVI stock. In my opinion, it’s certainly one of the top picks among video game stocks for the next 12 months.
Electronic Arts (EA)
With a consensus Overweight rating from analysts tracked by the Wall Street Journal, EA stock is another good name among video game stocks to consider. It’s also worth noting that EA has been largely sideways in the last six months. So, an upside from the current price of $137 is imminent, with the stock trading at an attractive forward price-to-earnings ratio of 24.95.
For Q2 2021, the company launched four games. On top of that, it has “launched over 125 games and content packs on Steam this fiscal year.” With EA’s aggressive launch of new games and live services, strong results are likely to come in the ensuing quarters.
As a matter of fact, the company’s Q2 2021 results exceeded the guidance, both in terms of top-line and earnings per share (EPS). Strong growth has translated into higher cash flows. For the last twelve months, the company reported $2.04 billion in operating cash flow (OCF). That has allowed the it to initiate dividends, for instance.
It’s also worth noting that EA’s live services include subscription revenue and revenue from the e-sports segment. The latter is still at an early growth stage, with the e-sports market on track to exceed $1.5 billion by 2023.
Considering these growth triggers, EA stock is worth holding. I’m not at all surprised that it’s getting attention on Wall Street.
Take-Two Interactive (TTWO)
TTWO stock is another interesting play when it comes to video game stocks. In the last one year, the stock has moved 56% higher. However, Take-Two currently trades near its 52-week high. Because of that, I would consider exposure on corrections.
In terms of business development, the company has acquired two companies since July 2020. For one, the acquisition of Playdot will help TTWO boost its mobile gaming strategy. What’s more, the company was also in a race to acquire Codemasters, which was eventually acquired by EA. So, it’s clear that Take-Two is pursuing an inorganic growth strategy. With strong financial flexibility, I expect it to remain active on the merger and acquisition front.
The company’s organic growth, however, will likely be driven by its 2K franchise. Just for November 2020, TTWO had several titles released under its 2K label, including Mafia: Definitive Edition and NBA 2k21. And if we go back to the company’s Q4 2020 conference call, the following point makes me bullish:
“[W]e currently have 93 titles planned for release over the next five years through fiscal 2025. Of the 93 titles, 63 are core gaming experiences, including 15 platform extensions of existing titles, 17 are mid-core or arcade style experiences and 13 titles are casual experiences.”
With this pipeline, long-term growth seems like it will be sustainable. So, with the help of industry tailwinds, TTWO is an attractive name worth keeping on your radar.
ZNGA stock currently has a Buy rating from 16 analysts and an Overweight rating from two. Likewise, I’m bullish on Zynga, which has been relatively sideways for the last six months.
Zynga is different from the other video game stocks on this list because 96% of its revenue is derived from mobile games (Page 9). Moreover, the company reported strong numbers in Q3 with the highest revenue and bookings in its history.
But another important point to note here is that Zynga reported revenue of $133 million from international markets in Q3 2019. That figure increased to $191 million in 2020. With that kind of regional diversification, the company is positioned for growth in the coming quarters. Plus, it also has a “multi-year pipeline of new games” in store. This will help boost its revenue and cash flow growth.
Finally, from a financial perspective, Zynga has also been generating solid free cash flows, which gives it a lot of flexibility for aggressive growth. For instance, it recently acquired Rollic, a move that will help it enter the fast-growing “hyper-casual games” market.
Overall, ZNGA stock looks attractive at its current levels. I expect a breakout on the upside, with the stock in an extended consolidation range.
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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.