Video game stocks continue to do well with the novel coronavirus pandemic acting as a short-term tailwind.
Strict stay-at-home instructions have left millions of people shuttered in with little to do, sending video game sales through the roof. Now that vaccines are rolling out, these gaming stocks are finally letting off some steam.
However, it would not be a prudent strategy to offload these tech titans. Many analysts, including myself, see gaming as a high-growth industry that will only expand with time. Plus, even though the pandemic is slowly moving into the background, the gold rush is expected to continue for the foreseeable future.
The gaming craze is also helped by new video game consoles (like Microsoft’s Xbox Series X and Sony’s PlayStation 5) and releases.
Read on to find why these five video game stocks are great additions to your portfolio:
- Activision Blizzard (NASDAQ:ATVI)
- Sony (NYSE:SNE)
- Electronic Arts (NASDAQ:EA)
- Tencent Holdings (OTCMKTS:TCEHY)
- NetEase (NASDAQ:NTES)
Video Game Stocks to Buy: Activision Blizzard (ATVI)
Activision Blizzard doesn’t get a lot of love when it comes to video game stocks for some reason. I find it astounding that this is so, considering the breadth of its interactive entertainment content and services.
The company is the result of a 2008 merger between Activision and Blizzard. The former was one of the biggest console game publishers, while the latter was one of the largest PC video game publishers.
Overall, the fundamentals are excellent for the company. In the last five years, sales have increased 11.6%, and EPS rose 18.7%. When you take a shorter horizon, the statistics are even more impressive. However, I like to take a five-year period for this analysis since it smoothes out the pandemic’s effect. Refinitiv data shows that the video game company surpassed Wall Street consensus estimates 11 times out of 12.
Despite all these positive beats, shares are down about 4% in a month. You can chalk that up to the lack of announcements at its annual BlizzCon event.
Ardent gamers were hoping for some update on Diablo 4 or Overwatch 2, two massive titles that are very important to its 2021 outlook. Nevertheless, it still has several excellent money-spinners in its portfolio, including but not limited to World of Warcraft and Call of Duty.
The lack of announcements certainly hurt the company’s prospects in the short term. I am a firm believer in the stock, though, which is why I encourage investors to buy this one whenever they see even the most minor dip in price.
No surprises that the next entry on our list is Sony. The launch of the PlayStation 5 was a massive tailwind for the Japanese multinational conglomerate.
Sony isn’t a one-trick pony, though. It has its fingers in several pies from music to movies to video games. A well-diversified conglomerate with six strong business segments has also beaten estimates 11 quarters in the last 12.
In short, the company is firing on all cylinders. The only issue it will face in the coming months are supply chain concerns as the company struggles with the PS5 rollout. Demand is very high, and the company launched this hotly-anticipated video console on Nov. 12, amidst a worldwide semiconductor chip shortage and a pandemic.
Renee Gittins, executive director at International Game Developers Association, believes the semiconductor shortage isn’t likely to be “fully relieved” until next year. However, when you are investing in SNE stock, you can rest easy. It’s such a diversified group that you will never have to worry about a segment not doing well in the interim.
Video Game Stocks: Electronic Arts (EA)
Much like ATVI, EA stock is down around 4% in the last month. You can chalk that up to muted guidance for its fiscal fourth quarter.
The video game publisher forecasts total net revenue of approximately $1.32 billion and a net loss of $19 million, or 7 cents per share. For the fiscal year 2021, net revenue is forecasted to come in at $5.60 billion, which is down substantially from its initial projections of $5.63 billion. EA’s full-year net income projection is also now down to $742 million from $942 million and EPS forecast to $2.54 from $3.15.
Apart from this, the company has done exceedingly well. With titles like FIFA, Madden NFL, Star Wars, Battlefield, the Sims, and Need for Speed, it’s no surprise why.
In the last four quarters, the company has beat expectations each time. According to consensus data compiled by Refinitiv, revenues will increase 16.6% and 24.5% in fiscal 2021 and 2022, respectively. The gross margin is an excellent 74.5%, not surprising considering the business’s asset-light nature, but impressive nonetheless.
TipRanks tracks 22 analysts offering 12-month price targets on EA stock. The average price target is $160.80, so there’s still plenty of room to make this one of the best video game stocks to buy.
Tencent Holdings (TCEHY)
Tencent is one of the biggest technology companies in the world. The Chinese multinational technology giant specializes in internet-related services and products.
However, it also has a sizeable gaming segment that has been performing well for quite some time. In the third quarter of 2020, the company reported a year-over-year (YOY) revenue growth of 29%, driven by a 45% increase in online game sales.
Due largely to this outstanding top-line growth, operating profit rose 34% YOY, and the operating margin grew to 30% from 29% in the year-ago period.
With such solid fundamentals, it’s no surprise that shares are trading at a premium valuation. As of the writing, TCEHY stock trades at around 42x trailing price-to-earnings.
I would wait for shares to cool off a bit before taking a dip, but the company’s business model and a large suite of products and services make it one of the best video game stocks out there.
We polish off this list with another Chinese internet technology company. NetEase is the second-largest online Chinese gaming company.
Some of the company’s most popular titles include “Fantasy Westward Journey,” the Onmyoji series, and “LifeAfter.” Apart from its own titles, it has a partnership with Warner Bros to develop “Harry Potter: Magic Awakened” and “The Lord of the Rings: Rise to War.”
The company isn’t super-reliant on licensing, though. Most of its revenue is generated by self-dseveloped games and contracts. For instance, NTES develops games for Activision Blizzard and Microsoft as well.
The Chinese software giant has beat analyst expectations five times in the last six quarters. Like several other companies on this list, NTES is a diversified conglomerate, with its several segments spanning everything from cloud music, advertising, email services, and e-commerce platforms.
Off about 10% in the last month, NTES stock as an enticing buying opportunity.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.