The gaming industry can seem like a gold mine, with over 3 billion gamers globally spending billions of dollars on interactive entertainment. However, while smash hits like Minecraft and Grand Theft Auto V can print money indefinitely, most games quickly fade into obscurity. This presents a major problem for gaming companies relying on just one or two titles to support their entire business. When the hits dry up or new releases flop, these firms can suffer catastrophic declines.
In this article, I highlight three gaming stocks that face precisely that risk of collapse, as their current games lose steam. While generational franchises like Call of Duty and Mario Kart evolve across endless sequels, one-trick studios without deep IP portfolios often struggle to replicate past success. And with mobile gaming lowering consumer pricing expectations, premium $60 console titles don’t cut it anymore, without delivering a knockout experience.
Investors backing such studios without rigorous analysis risk getting caught up in the aftermath. So before the damage accelerates, let’s explore three gaming stocks on the brink and why you should dump them immediately.
FaZe Holdings (FAZE)
FaZe Holdings (NASDAQ:FAZE) operates as a gaming and lifestyle brand focused on influencer content, esports teams, and merchandising. However, its business model has been on a downward spiral and its future growth potential seems bleak.
Unlike traditional gaming companies, FaZe does not develop video games. It generates revenue primarily through brand sponsorships, consumer products, and entertainment. This leaves FaZe heavily reliant on the popularity of its roster of influencers and esports teams to drive its success. In its latest earnings report, FaZe announced a Q2 net loss of $14.4 million on revenue of just $11.7 million. Simply put, it is a dying clan and many of their team members are fading into obscurity. I believe this company fits the definition of a ticking time bomb as it does not have any way long-term backup plan if FaZe members continue to lose popularity or simply lose interest.
FaZe also faces risks tied to constantly evolving gaming and influencer trends. It is struggling to attract sponsorships and merchandise sales, and expanding into areas like Web 3.0 and NFTs hasn’t worked.
IGG Inc (IGGGF)
IGG Inc (OTCMKTS:IGGGF) is a Singapore-based mobile game developer that has faced challenging market conditions in China. The Chinese government has implemented strict regulations limiting play time for video games, which are basically unheard of anywhere in the world. However, it has been very effective, and gaming companies are complying religiously. To give you an idea, children under the age of 18 can only play video games for one hour per day, and gaming companies are required to verify children’s identity. If these time limits are passed, users can also receive in-game penalties.
In its latest earnings report, IGG announced a net loss of $359.8 million for the first half of 2023. This was despite a 30% year-over-year decline in R&D expenses and a 19% drop in administration costs. The company’s flagship title, Lords Mobile, accounted for most of its total revenue. While Lords Mobile has provided stable revenue, it is a 7-year-old game that likely has limited longevity. IGG’s investments in new games like Doomsday: Last Survivors and Viking Rise have not yet offset the declines in its older titles.
Plus, China’s tight regulatory environment presents an enduring headwind for IGG. The company will need to continue diversifying its portfolio and expanding in international markets to reduce its reliance on China. IGG’s push into areas like mobile apps could provide future growth if executed successfully. However, China’s gaming restrictions will remain a challenge. IGG has a strong legacy game in Lords Mobile but needs new breakout hits to reignite revenue growth. I don’t see that happening soon.
Enthusiast Gaming (EGLX)
Enthusiast Gaming (NASDAQ:EGLX) operates one of the largest gaming information networks in the world. However, its business is soaked in red ink and faces considerable risk. The company owns over 100 gaming websites, including Destructoid and Daily Esports, generating revenue primarily through programmatic advertising across its network. It also has operations in content production, esports events, and subscription services.
However, In Q2 2022, Enthusiast posted a net loss of $10.2 million on revenue of $31.6 million. The company’s gross margin did improve to 35%, as the company reduced its reliance on low-margin programmatic ad revenue. However, Enthusiast still faces financial pressures, with $24.6 million in operating expenses last quarter.
Enthusiast Gaming plans to continue pivoting toward higher-margin revenue streams and focus on cost-reduction efforts to reach profitability. However, the ad market faces macro headwinds and competitors like Amazon (NASDAQ:AMZN) are entering the gaming content space. Sure, Enthusiast can cut costs further, but I don’t think it will make the stock any more compelling. Revenue growth is the most critical metric for a growth-centric company like Enthusiast, especially when it is small. With revenue declining at a 20% annual clip, as of Q2, there are too many red flags here, in my opinion. The company’s president also resigned a few weeks ago, signaling internal turmoil could be building.
On the date of publication, Omor Ibne Ehsan 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.
