Ever since hobbyists began making simple video games on the earliest computer hardware, video games have been a fascination for millions of people — in July 2021, it was reported that two-thirds of Americans played video games. But even with that huge number, you might be shocked to learn just how huge the video game market is and how lucrative video game stocks are.
From 2011 to 2021, the U.S. video game market grew from $38.6 billion to $85.9 billion — that’s a compound annual growth rate (CAGR) of 8.3%. Reaching $6 billion in revenue in 2018, Take-Two Interactive’s (NASDAQ:TTWO) Grand Theft Auto V is the most successful piece of entertainment media of all time, but it’s far from the only game to make billions of dollars.
But like any industry this large, there are numerous companies all looking for their piece of the pie, and they aren’t all made equal. Let’s take a look at some of the key companies in the industry and then discuss some of the catalysts and risks of the video game industry.
Who’s Making Money in Video Games?
Broadly speaking, the video game industry can be broken down into hardware manufacturers and publishers. Games can also be broken down into console, PC (personal computer) and mobile games, each of which bring their own considerations. Furthermore, some related trends like esports and streaming play off of video games.
Key hardware manufacturers include companies like Microsoft (NASDAQ:MSFT), Sony (NYSE:SONY) and Nintendo (OTCMKTS:NTDOY). They also include chip makers like Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD). PC gamers rely on a mix of Nvidia and AMD graphics cards. Microsoft’s Xbox Series S and Series X and Sony’s PlayStation 5 both use chips made by AMD, while Nintendo’s Switch uses an Nvidia chip.
All three major console manufacturers also publish and develop their own titles, but plenty of other companies worth paying attention to stick to just publishing. Major publishers include Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), NetEase (NASDAQ:NTES), Roblox (NYSE:RBLX), Take-Two, Tencent (OTCMKTS:TCEHY), Ubisoft (OTCMKTS:UBSFY), Square Enix (OTCMKTS:SQNNY) and Bandai Namco (OTCMKTS:NCBDY).
On the PC side of things, two private companies offer major platforms for digital game sales. (The majority of all game sales are digital, but that fact is particularly true for PC games, where only 2% of 2020 revenue came from physical games). Valve offers games on the Steam platform, and Epic Games, which Tencent has a 40% ownership stake in, operates the Epic Games Store. While both companies are privately owned, they’re worth paying attention to since nearly every other publisher sells games on their platforms.
Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are the most significant companies in mobile gaming. While more powerful gaming is certainly a driver for some consumers when selecting a phone, the revenue that the iOS and Android platforms skim off the top of mobile game sales and in-app purchases makes both companies huge players in the space. In 2019, Apple made more money from game sales than Microsoft, Sony, Nintendo and Activision Blizzard combined.
Amazon (NASDAQ:AMZN) is the biggest name in streaming. Its Twitch platform is home to most of the biggest names in live game streams. Esports and streaming were expected to make $2.1 billion in 2021 and are expected to make $3.5 billion in 2025. Super League Gaming (NASDAQ:SLGG), Allied Esports Entertainment (NASDAQ:AESE) and Skillz (NYSE:SKLZ) are among the companies that have attempted to carve out a niche in esports. SLGG and AESE are both penny stocks with market capitalizations below $100 million.
Leveling Up: Key Catalysts for Video Game Stocks
The single greatest catalyst for video game stocks in the past several years has been the Covid-19 pandemic; as people have been forced to stay at home instead of socializing in person, video games have provided an opportunity to spend time with others virtually.
As I mentioned earlier, Grand Theft Auto V is the most financially successful piece of media of all time, and 2020 was actually the most successful year for the game since its 2013 release. Traditionally, games have have made the vast majority of their revenue in the window immediately following release. It’s one of many games that benefited from the pandemic.
The other factor that has contributed to the success of Grand Theft Auto V and numerous other games is its status as a “live service game.” Before every video game console was connected to the internet, it was rare for most games to receive updates. Exceptionally popular PC games might get an expansion or two, but for most games, the cartridge or disc you bought was all the game will ever be.
For most games, that’s no longer the case. Updates and patches mean that bugs can be fixed after launch, but more importantly, games can offer new paid and free content for months or years after release. Games like Fortnite come with seasonal updates that bring new stories, changes to in-game maps and most importantly, new things to buy.
The games themselves aren’t the only things with regular new releases, of course. As computer hardware has grown more powerful, console manufacturers have released better consoles offering new capabilities. As the cliché goes, video games have come a long way since Pac-Man.
New console releases are divided into generations lasting around five to seven years, and we’re currently in the ninth generation of video game consoles. Most major consoles in recent decades have included at least one hardware refresh partway through each generation offering things like updated designs, improved capabilities, greater storage space and cheaper pricing.
On the PC side, AMD and Nvidia both regularly release new, more powerful graphics hardware. Both companies produce several new tiers of graphics cards every year with major architecture updates typically happening every few years.
Game Over? Video Game Stock Headwinds
The biggest risk to video game stocks is gamers themselves. More than perhaps any other form of media, video game enthusiasts tend to see themselves as a cohort, which means that a strong group identity based around a particular hardware or software choice can result in a company underperforming.
For example, upon its release, the PlayStation 3 was widely seen as being overpriced and having a poor library of titles (“PS3 has no games” has remained a popular way of humorously deriding the console for years). The launch of the PlayStation 4 was comparably far more successful, and it has enjoyed substantially larger lifetime sales.
At the same time that the PS3 was failing to attract buyers, many gamers flocked to the Xbox 360, but the follow-up, the Xbox One, landed with a comparative thud and failed to reach the same heights as its predecessor. There are plenty of reasons why certain consoles succeed and fail, but the biggest by far is a highly informed consumer base, which means that gaffes have an outsized effect on revenue.
Video game publishers have a strong tendency toward controversy, especially as it relates to treatment of workers. Activision Blizzard became a pariah overnight in 2021 when California’s Department of Fair Employment and Housing filed a lawsuit against the company. Activision Blizzard’s culture has been described as creating a “breeding ground for harassment and discrimination against women.”
Activision Blizzard (which saw its stock plummet following the lawsuit) is hardly the first video game company to be mired in controversy. Electronic Arts has been high atop lists of the worst companies in America on multiple occasions, taking home the dubious honor of No. 1 in 2012. And numerous major publishers have engaged in crunch, the practice of forcing employees to work extremely long hours — sometimes 100 or more — to meet release deadlines.
Furthermore, numerous companies engage in massive layoffs even following seemingly successful development cycles. In 2017, the International Game Developers Association found “found that game workers had an average of 2.2 employers in the previous five years.”
This all adds up to developers typically leaving the industry after three to six years. In any other industry, talented professionals leaving at such a rapid pace would be cause for alarm, but in the video game industry, it’s normal.
Laying off the employees who don’t simply quit after forcing them to work 100 or more hours might be good for the sort of immediate profits that the industry thrives on, but it should give pause to any potential investor who cares about long-term success. A company like Activision Blizzard’s alleged mistreatment of its employees is profitable right up until it isn’t.
In early 2022, Microsoft announced an acquisition of Activision Blizzard — not the company’s first gaming acquisition, but by far its largest. Microsoft CEO Satya Nadella has pledged “to build a culture where everyone can do their best work.” That’s great news for Activision Blizzard workers, though it’s important to remember that the problems in the industry run deeper than just one company.
Investing in Video Game Stocks Through Video Game ETFs
If you find the pros of investing in video game stocks enticing enough to overcome the cons, you might consider investing in a video game exchange-traded fund (ETF). ETFs allow investors to invest in a “basket” of stocks that are related in some way, and there are several to consider that focus on video game stocks:
- VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO) has an expense ratio of 0.55% and had its inception in October 2018.
- Global X Video Games & Esports ETF (NASDAQ:HERO) has an expense ratio of 0.5% and had its inception in October 2019.
- Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSEARCA:NERD) has an expense ratio of 0.5% and had its inception in December 2018.
- Wedbush ETFMG Video Game Tech ETF (NYSEARCA:GAMR) has an expense ratio of 0.75% and had its inception in March 2016.
Each ETF has its own holdings that change over time, and each one also has its own procedures for managing its assets. While ETFs are designed to make it easier to invest in a particular way without having to do all the work of identifying each individual company’s strengths and weaknesses, by no means are all ETFs created equally.
Top Video Game Stocks to Watch
Avril Ayers is a web editor for InvestorPlace.com. On the date of publication, they did not hold any position (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.