Potential toy shortages consumers face this holiday season have become a hot topic both on Wall Street and Main Street, with many wondering which toy stocks will see the greatest benefit. While retailers continue to adapt to global supply chain issues, not every retailer will see its toy shelves stocked fully ahead of the Christmas season. There will certainly be items that will sell out faster than usual, and they are likely to be restocked slower than expected.
Despite the pandemic, demand has been resilient for the toy industry. In recent months, manufacturers like Mattel (NASDAQ:MAT) and Hasbro (NASDAQ:HAS) have reported robust sales, beating Wall Street expectations and proving the value of toy stocks. Early planning and stockpiling have proved helpful for many retailers as the industry enters a sky-high-demand holiday season.
In addition to toy stocks and retailers, analysts are also paying close attention to game stocks that are likely to benefit from higher sales in the coming weeks.
With that said, here are the seven games and toy stocks to buy that should gain significant traction in the winter months ahead:
- Electronic Arts (NASDAQ:EA)
- Funko (NASDAQ:FNKO)
- Global X Video Games & Esports ETF (NASDAQ:HERO)
- Take-Two Interactive Software (NASDAQ:TTWO)
- Target (NYSE:TGT)
Toy Stocks: Electronic Arts (EA)
52-week range: $116.41 – $150.30
Dividend yield: 0.47%
Redwood City, California-based Electronic Arts is a leading video game publisher for consoles, PC, and mobile. It publishes many popular franchises, such as Madden, FIFA, Battlefield and Need for Speed.
EA announced Q2 FY22 results on Nov. 3. Revenue increased 59% year-over-year (YOY) from $1.15 billion to 1.83 billion. Bookings, which account for deferred revenue, soared 27% to $7.08 billion over the past 12 months. The company reported net income of $294 million, or $1.02 a share, compared to $185 million, or 63 cents a share, in the prior-year period. Cash and equivalents ended the period at $1.63 billion.
On the results, CEO Andrew Wilson said, “This was the strongest second quarter in the history of Electronic Arts, with more players around the world joining and engaging in our leading franchises, new launches and live services.”
More than 60% of the company’s revenue comes from live services, which constitute an increasing portion of revenue. Management raised its outlook for the year. Analysts predict third-quarter earnings of $3.25 per share on $2.68 billion of revenue.
EA stock is around $141, down 3% year-to-date (YTD). Share are trading at 22.8 times forward earnings and 6.6 times trailing sales. Interested readers could regard any further decline in EA price as an opportunity to invest.
52-week range: $6.83 – $27.20
Everett, Washington-based Funko manufactures branded collectible pop culture products. Its licensed merchandise covers a large segment of popular culture, including movies, television shows, sports, music, video games and other cultural icons.
Funko announced Q3 results on Nov. 4, beating expectations on revenue and earnings per share (EPS). Net sales increased 40% YOY to $267.7 million. Adjusted net income came in at $21.1 million, or 39 cents per diluted share, compared to $16.1 million, or 31 cents per diluted share, a year ago. Total liquidity stood at $193.2 million, up 81% YOY. Cash and equivalents ended the quarter at $93.2 million.
After the announcement, CEO Brian Mariotti cited, “As a credit to our brand, we are continuing to expand our product categories and fan base, increasing fan engagement and bringing innovative new products to market.”
Thanks to its loyal fanbase of collectors, the demand for its collectible vinyl figurines keeps increasing. Funko boasts over 1,000 licensing agreements of the hottest brands. It grows by signing new licenses and extending old ones.
Funko also plunged into the non-fungible token market, releasing limited edition digital card packs that include rare cards. Buyers can trade these rare cards to profit from the collectibles market.
The company anticipates net revenue of $915 million for fiscal year 2021. FNKO stock has significant momentum, hovering currently at $18 territory. It has surged 76% year-to-date (YTD) and over 150% over the past year.
Shares are trading at 17 times forward earnings and 0.8 times trailing sales. Potential buyers could find value around these levels.
Toy Stocks: Global X Video Games & Esports ETF (HERO)
52-Week Range: $26.23 – 37.23
Expense ratio: 0.50% per year
Our next discussion is on an exchange-traded fund (ETF), namely the Global X Video Games & Esports ETF. The fund invests in businesses benefiting from the growth of the video games industry.
They include those that develop and publish video games, stream video gaming or esports content, operate within competitive esports leagues, or manufacture hardware used in video games and esports. HERO focuses on stocks with high growth potential.
Metrics highlight that the global gaming market “was valued at USD 173.70 billion in 2020, and it is expected to reach a value of USD 314.40 billion by 2026, registering a CAGR of 9.64% over 2021-2026.” Understandably, the pandemic accelerated the adoption of at-home entertainment options, with many people turning to gaming and esports, possibly for the first time, bolstering the theme’s reach.
HERO, which started trading in October 2019, has 40 stocks. The fund also offers geographical diversification. 30% of its holdings are based in the U.S., followed by Japan (25%), South Korea (14%), and China (10%).
The leading five holdings on the roster are the chip giant Nvidia (NASDAQ:NVDA), Singapore-based provider of digital entertainment Sea (NYSE:SE), online game services provider NetEase (NASDAQ:NTES), Electronic Arts and Take-Two Interactive. These five names account for around 34% of HERO’s net assets of $511 million.
HERO is up 2% YTD, and returned 17% over the past year. Potential investors could regard the current level as a good entry point.
52-week range: $86.05 – $104.89
Dividend Yield: 2.79%
Pawtucket, Rhode Island-based Hasbro is a well-known play company with a world-class brand portfolio. From toys and games to motion pictures and television programs, Hasbro reaches consumers around the globe.
The toy group released Q3 results on Oct. 26. Revenue went up by 11% YOY to $1.97 billion. Adjusted net earnings increased 5% to $271.2 million, or $1.96 per diluted share, beating analysts’ estimates of $1.70 per share. However, the company warned that higher freight costs would pressure margins in the fourth quarter. Cash and equivalents ended the quarter at $1.18 billion.
Interim CEO Rich Stoddart remarked, “The Hasbro team performed at an extremely high level to deliver double-digit revenue growth, strong earnings and cash flow for the quarter, driven by our diversified business model.”
Hasbro shifted from toys and games into entertainment with the $3.8 billion acquisition of children’s TV and producer Entertainment One in 2019. Its TV and film production business delivered robust growth in the third quarter.
Productions such as My Little Pony and the musical adaptation Come From Away boosted the segment’s revenue by 76% YOY. This performance has helped cushion some of the $100-million hit the company took from toy shipment delays due to supply chain issues.
Hasbro anticipates 2021 revenue to increase between 13% and 16%. Given its growing profitability and dividend yield of 2.7%, it may be a good time to buy HAS shares. They currently hover slightly above $99 territory, up only 6% YTD. Shares are trading at 17.9 times forward earnings and 2.2 times trailing sales.
Toy Stocks: Mattel (MAT)
52-week range: $13.39 – $23.31
El Segundo, California-based Mattel offers a wide range of toy products for children and families worldwide. Management announced Q3 results on Oct. 21.
Revenue increased 8% YOY to $1.76 billion. Net income came in at $812.6 million, or $2.29 per diluted share, compared to a net income of $311.3 million, or net earnings of 89 cents per diluted share, in the prior-year quarter. It generated a free cash flow of $320.3 million during the quarter.
After the release of the metrics, CEO Ynon Kreiz commented, “This was another strong quarter for Mattel, with increased consumer demand for our products and results exceeding expectations. We successfully navigated ongoing global supply chain disruption, achieved sales growth and, per The NPD Group, continued to gain market share.”
Mattel reported significant growth in gross billings of Barbie and Hot Wheels. Additionally, management is positioning its top brands for success at the box office.
Wall Street believes there could still be substantial upside as Mattel continues to grow its business. Management anticipates full-year net sales in constant currency to increase by 15% YOY, up from the prior guidance range of 12-14%.
MAT stock trades at $22.50, up 29% YTD and 61% over the past year. Despite the recent surge in price, shares are trading at 16 times forward earnings and 1.5 times trailing sales, for example, lower than its peer Hasbro trading at 2.2x trailing sales.
Take-Two Interactive Software (TTWO)
52-week range: $144.58 – $214.91
New York-based Take-Two Interactive Software is one of the largest video game publishers on consoles, PCs, smartphones and tablets. The company boasts titles that have become a part of pop culture, such as Grand Theft Auto V and the NBA 2K franchise. A pipeline of 62 new releases is planned between now and March 2024.
Take-Two issued Q2 fiscal year 2022 results on Nov. 3. Net revenue increased 2% YOY to $858.2 million. GAAP net income was $10.3 million, or 9 cents per diluted share, compared to $99.3 million, or 86 cents per diluted share, in the prior-year quarter. Cash and short-term investments ended the period at $2.3 billion.
Following the announcement, CEO Strauss Zelnick remarked, “Our second quarter results were outstanding, highlighted by Net Bookings of $985 million, which greatly exceeded our expectations and increased 3% as compared to last year.”
Despite the expected decade-long growth in the gaming market, recent research suggests, “2021’s global games market will generate revenues of $175.8 billion, a slight year-on-year decline of -1.1%. By the end of the year, there will be 2.9 billion players worldwide.”
Such a decline will come after the unusual surge in growth during the pandemic last year. Take-Two’s management is also guiding for $3.45 billion in revenue for its current fiscal year, compared to $3.37 billion last year. Analysts anticipate a swift return to double-digit growth for fiscal 2023.
TTWO stock currently trades at around $178, down nearly 14% YTD. Shares are trading at 39 times forward earnings and 6.4 times trailing sales. Potential investors could regard the $177 level as a better entry point.
Toy Stocks: Target (TGT)
52-week range: $160.51 – $268.98
Dividend yield: 1.4%
As one of our leading multi-channel retailers, Minneapolis, Minnesota-based Target needs little introduction. It operates more than 1,900 stores offering various products across several categories. Target also boasts a powerful combination of digital shopping options and capabilities that rival formidable competitors in e-commerce.
The retailer reported Q2 results in mid-August. Revenue increased almost 10% YOY to $25.2 billion. Net income came in at $1.8 billion, or $3.65 per diluted share, up from $1.7 billion, or $3.35 per diluted share, in the prior-year period. Cash and equivalents ended the quarter at $7.4 billion.
CEO Brian Cornell said, “In the second quarter, our business generated continued growth on top of record increases a year ago, reinforcing Target’s leadership position in retail.”
Target has robust omnichannel capabilities. For instance, its same-day services, such as in-store pickup and same-day delivery, have become primary growth drivers. Meanwhile, the company is chartering its own container ship to ensure it doesn’t have short-term inventory headaches.
Management also aims to increase its market share in the U.S. toy market. In the second quarter, toy sales increased by more than 20%.
Analysts project the company to report revenue of $24.5 billion and earnings per share of $2.81 in the third quarter. Moreover, Target is on track to become a Dividend King by raising its payout for the 50th consecutive year.
TGT stock currently hovers at $263, up 51% YTD. Shares are trading at 20 times forward earnings and 1.3 times trailing sales. A potential decline toward $250 or even below would improve the margin of safety.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education 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.