The GameStop (NYSE:GME) saga drew the attention of investors and scrutiny from regulators. The short squeeze rally took GME stock to a high of $347. Today, the stock has corrected all the way down to around $48 and looks to be falling. Of course, gaming stocks have a multi-year industry tailwind. However, individual stocks can be under-performers even in a high growth industry.
As an investor, there is one important takeaway for me. Speculation or factors like a short squeeze can trigger a hyperbolic rally. However, the stock price will soon reflect fundamentals.
In the end, a handful of investors might make money, but there will be a significant number of investors who will end-up trapped in a fundamentally weak stock. GME stock is a good example.
I intend to discuss four gaming stocks that are better than GME stock. Be it from a short-term trading or long-term investing perspective, investors can consider these quality gaming stocks.
- Glu Mobile (NASDAQ:GLUU)
- Activision Blizzard (NASDAQ:ATVI)
- Electronic Arts (NASDAQ:EA)
- Corsair Gaming (NASDAQ:CRSR)
4 Gaming Stocks Better Than GME: Glu Mobile (GLUU)
GLUU stock is probably among the few undervalued names among gaming stocks. The stock currently trades at a price-to-earnings ratio of 16.3. With earnings likely to grow at 32.87% this year, GLUU has a price-earnings-to-growth-ratio (PEG) of 0.5. In general, a PEG of 1 indicates fair value. I would not be surprised if GLUU stock doubles in the next 12-months.
For the third quarter of 2020, the company reported 34% growth in revenue and 38% growth in bookings. Importantly, Glu Mobile delivered free cash flow (FCF) of $31.5 million. If FCF remains consistently strong, there is a solid case for long-term value creation. The company already has $318.1 million cash that can be used for organic and inorganic growth.
Glu Mobile has provided initial guidance on bookings to be in the range of $595 to $605 million for the current year. However, this guidance does not include potential growth from four new IP titles to be launched.
An updated guidance is likely to be a key stock upside trigger. Glu Mobile also expects margin expansion in the range of 220 to 420 basis points in fiscal year 2021 as compared to the last year. If margins do improve in the next few quarters, GLUU stock is likely to surge.
Activision Blizzard (ATVI)
ATVI is another attractive name among gaming stocks that’s trading at reasonable valuations. After consolidation around $80 levels, ATVI stock has moved higher.
I believe that the rally is likely to sustain in the current year. Recently, Berenberg investment bank increased the price target for the stock to $100 calling it a “higher-potential growth name.”
In terms of growth, Call of Duty remains the key catalyst. Modern Warfare and Warzone have triggered strong upside in monthly active users. I believe that these titles will continue to deliver growth. In addition, Call of Duty Mobile has been among the highest-grossing new games in the U.S. app stores. In China, more than 50 million users have pre-registered.
Activision Blizzard reported a net cash position of $3.95 billion as of September 2020. This gives ample financial flexibility for continued investment in a successful franchise. The company already believes that “the pipeline across our portfolio and the potential for revenue and earnings expansion has never been stronger.”
Overall, ATVI stock trades at attractive levels considering the earnings growth potential. On any given day, I would consider this fundamentally strong stock as compared to GME stock, which is purely speculative.
Best Gaming Stocks: Electronic Arts (EA)
EA stock has been relatively subdued with an upside of 38% in the last year. The company is fundamentally strong and EA stock is attractive for exposure at a current P/E of 26.4.
Currently, 16 analysts have a “buy” rating on the stock and four analysts have an “overweight” rating. This is a good indicator that EA stock is likely to trend higher from current levels.
It’s worth noting that for Q3 2021, the company launched four new games. In addition, for the first nine months of the fiscal year, ten games have been launched. New launches coupled with the creation of a diversified portfolio of live services are key growth triggers.
As an example, FIFA ultimate team matches have grown by 177% on a year-on-year basis. The company’s EA SPORTS franchises have “engaged more than 230 million people over the past fiscal year.”
From a financial perspective, Electronic Arts has been generating healthy operating and free cash flows. EA stock currently has an annual dividend payout of $0.68, and I expect steady growth in dividends.
Overall, management is optimistic about growth in live services and EA SPORTS. Also worth getting excited about is the potential launch of the next edition of Battlefield. I would not be surprised if the stock delivers 20% to 25% returns in the next few quarters.
Corsair Gaming (CRSR)
CRSR stock, which listed in September 2020 at $14.25, currently trades above $43. Even after the big rally, CRSR stock trades at an attractive forward P/E of 27.7. I believe that some exposure can be considered at current levels.
As an overview, Corsair Gaming is an “innovator of high-performance gear for gamers and content creators.” The company is on a high-growth trajectory and the stock upside is backed more by fundamentals than speculation.
For Q3 2020, the company reported revenue of $457.1 million, which was higher by 60.7% on a year-on-year basis. For the same period, the company’s EBITDA was $63.7 million with EBITDA growth at 184.9%. Corsair also reported an operating cash flow (OCF) of $24.7 million and this implies an annualized OCF of $100 million.
With a robust pipeline of product innovation, it’s likely that strong top-line and cash flow growth will sustain for the company. With the recent initial public offering and positive OCF, the company has also been successful in deleveraging.
Overall, CRSR stock is attractive. As the video game industry continues to grow, the company’s products will witness strong demand.
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.