Widespread lockdown, social distancing and working from home have prompted millions to take up hobbies and creative pursuits as distraction amid the COVID-19 pandemic. One of the direct beneficiaries has been the videogaming industry. With a large captive audience and plenty of time to kill, video-game makers are seeing increased activity as people confined at homes turn to online gaming to ease loneliness.
As a low-cost entertainment option, gaming is here to stay. Video games market is projected to see explosive growth to become a US$300 billion market in 2025, from US$130 billion in 2018, growing 13% annually, according to research firm GlobalData. The gaming market will continue to be dominated by the U.S. and China, with Asia-Pacific producing nearly half of the global gaming revenue.
A conspiracy of factors including soaring esports popularity, mobile gaming growth, innovative technology, 5G rollout, and cloud gaming create a long runway of growth for video game producers. These companies are at the forefront of the global gaming market and are well positioned to hold the biggest share of it. These leading names provide a meaningful exposure to investors looking for some videogaming industry play.
| Electronic Arts | ||
| Ticker | EA | |
| Current yield: | - | |
| Forward P/E: | 23.26 | |
| Price | US$112.71 | |
| Fair value: | US$112 | |
| Value | Fairly valued | |
| Moat | Narrow | |
| Moat Trend | Stable | |
| Star rating | *** | |
| Data as of April 30, 2020 | ||
One of the world's largest third-party video-game publishers, Electronic Arts (EA) has pivoted from a console-based video game publisher to a leading publisher on consoles, PC, and mobile. The firm’s popular franchises include Madden, FIFA, Battlefield, Mass Effect, Dragon's Age, and Need for Speed. EA recently signed a 10-year contract with Disney, earning rights to develop Star Wars games across all platforms.
The video-game maker is well equipped to consolidate its leading position by developing compelling new versions of its existing franchises, supported by its Star Wars license. “We expect EA to continue to benefit from the growth of the current generation of consoles (Xbox One, PlayStation 4, and Nintendo Switch), the ongoing revitalization of PC gaming, and the growth in mobile gaming space,” says a Morningstar equity report, noting the company has benefited from the bifurcation of the market placing major AAA blockbuster titles on one side and smaller independent games on the other.
“The firm’s recent success with Apex Legends demonstrates the opportunity available to EA,” says Morningstar equity analyst, Neil Macker, who recently upped the stock’s fair value from US$108 to US$112, prompted by faster digital revenue growth, and projects 7% annual revenue growth from 2020 through 2024.
| Activision Blizzard Inc | ||
| Ticker | ATVI | |
| Current yield: | 0.63% | |
| Forward P/E: | 27.17 | |
| Price | US$63.77 | |
| Fair value: | US$66 | |
| Value | Fairly valued | |
| Moat | Narrow | |
| Moat Trend | Stable | |
| Star rating | *** | |
| Data as of April 30, 2020 | ||
Videogaming royalty, Activision Blizzard (ATVI) is behind some of the most compelling and lucrative franchises of all time, including World of Warcraft, which boasts more than US$8 billion of lifetime sales, and Call of Duty, which has sold over 175 million copies across 14 titles over 12 years. Activision owns seven franchises that have grossed over US$1 billion in revenue--World of Warcraft, Call of Duty, Skylanders, Diablo, StarCraft, Overwatch, and Hearthstone.
“The firm is well placed to consolidate its leading position by developing compelling new versions of its existing franchises and by introducing new experiences, such as Hearthstone and Overwatch,” says a Morningstar equity report, adding that the videogame maker will “continue to benefit from the upcoming console upgrade cycle, the ongoing revitalization of PC gaming, and the growth in the mobile market via its King Digital subsidiary.”
The publisher is expected to continue to monetize the user base at King Digital by inserting additional third-party ads in the company’s mobile games, which could bear fruit over time. “While we think Activision can generate some additional revenue via this path, we would caution that a substantial revenue contribution could take until beyond 2020 to appear,” says Macker, who puts the stock’s fair value at US$66, projecting annual revenue growth to average 6% over the next five years.
| Take-Two Interactive Software | ||
| Ticker | TTWO | |
| Current yield: | - | |
| Forward P/E: | 24.39 | |
| Price | US$120.38 | |
| Fair value: | US$118 | |
| Value | Fairly valued | |
| Moat | Narrow | |
| Moat Trend | Stable | |
| Star rating | *** | |
| Data as of April 30, 2020 | ||
Take-Two (TTWO) is an independent videogame publisher that owns two labels, Rockstar and 2K Games, which develop and publish a rich bouquet of well-known videogame franchises including Grand Theft Auto (220 million units sold), NBA 2K, Civilization, Borderlands, Bioshock, and Xcom.
“We believe the firm is well positioned not only to capitalize on the success of Grand Theft Auto, but also to continue diversifying its revenue beyond its signature franchise,” says a Morningstar equity report, adding that the company stands to profit both from the growing popularity of the current generation of consoles (Xbox One, PlayStation 4, and Nintendo Switch) and the revival of PC gaming.
Take-Two has capitalized on the growing chasm in the industry between major AAA blockbuster titles and smaller independent games. It focuses on the higher end, investing in the higher-budget blockbusters and using its marketing heft to support its titles. “Over the past 10 years, the firm has established new franchises such as Borderlands while reinvigorating older ones like Xcom,” asserts Macker, who appraises the stock to be worth US$118, forecasting annual revenue growth of 4% over the next five years.
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