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3 Videogame Stocks to Play

The global videogames market is projected to top US$175 billion in revenue in 2021, nearly half of which will be from mobile gaming

Vikram Barhat 9 June, 2021 | 2:51AM
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Video gamer

The pandemic pushed interest in video games to an all-time high. Industry experts contend the gaming boom won’t fizzle when the economy reopens following vaccine rollouts. This makes gaming publishers look like attractive prospects for portfolio allocation.

Videogaming has a large, loyal, and growing following that drove global console sales to a record US$56 billion in 2020. The global videogames market is projected to top US$175 billion in revenue in 2021, nearly half of which (US$90.7 billion) to come from mobile gaming. The market is forecasted to continue to enjoy healthy growth surpassing US$204 billion at the end of 2023, growing 7% annually.

Leading video game producers benefit from the tailwind generated by a slew of industry trends ranging from hardware tech innovation, faster internet speeds, growing disposable income in some geographies and the explosive growth in cloud gaming. The following names offer a meaningful exposure to investors looking for pure play videogaming stocks. 

Electronic Arts Inc 

 

Ticker

EA

 

Current yield:

0.48%

 

Forward P/E:

22.94

 

Price

US$141.99

 

Fair value:

US$134

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of June 03, 2021

Electronic Arts (EA) is one of the world's largest third-party video game publishers. Its stable of popular franchises includes some of the most well-known video game franchises such as FIFA, Madden, and Battlefield.

“The firm will consolidate its leading position by developing compelling new versions of its existing franchises, creating new ones like Apex Legends and acquiring established ones like F1 from Codemasters,” says a Morningstar equity report.

The game publisher is expected to continue to benefit from the upgraded, new generation of consoles, the ongoing revitalization of PC gaming, and the meteoric rise in the popularity of mobile gaming. “We expect the company to continue using its stable of franchises and licenses to create new games, particularly in the free-to-play, or F2P, space,” says Morningstar equity analyst Neil Macker, who recently raised the stock’s fair value from US$118 to US$134, prompted by the ninth-generation console launches and increased digital revenue growth on lockdown boost.

EA will generate steady revenue underpinned by the release of new sports franchises and Battlefield on an annual and biennial basis, respectively, he adds. Expectedly, Electronic Arts posted a strong end to fiscal 2021 racking up net revenue of US$1.35 billion and net bookings of US$1.49 billion, both surpassing estimates. 

Activision Blizzard Inc 

 

Ticker

ATVI

 

Current yield:

0.49%

 

Forward P/E:

26.39

 

Price

US$94.98

 

Fair value:

US$97

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of June 03, 2021

Videogaming juggernaut, Activision Blizzard (ATVI) is one of the largest PC video game publishers. The company’s impressive franchise portfolio includes World of Warcraft (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.

The firm is set to consolidate its dominance by developing compelling new versions of its existing franchises while introducing new experiences, such as Hearthstone and Overwatch. “We expect Activision to continue to benefit from the current console upgrade cycle, the ongoing revitalization of PC gaming, and the growth in the mobile market via its King Digital subsidiary,” says a Morningstar equity report.

Activision has benefited from the wedge splitting the industry between major blockbuster titles and smaller independent games. “Activision generally focuses on the higher end of the market, using its capital to fund higher-budget blockbusters and its marketing scale to support its titles across multiple advertising platforms,” says Macker, who recently raised the stock’s fair value from US$92 to US$97, to account for the growth of higher-margin in-game bookings.

The publisher is pushing to engage users beyond the initial game sale by expanding the use of multiplayer options and releasing downloadable content. “Both methods encourage gamers to hold on to the original game longer than in previous generations and provide an income stream from consumers who purchase the game secondhand,” Macker contends.

  Take-Two Interactive Software Inc 

 

Ticker

TTWO

 

Current yield:

-

 

Forward P/E:

33.67

 

Price

US$177.73

 

Fair value:

US$184

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of June 03, 2021

Take-Two (TTWO) is an independent video game publisher with a global reach and is the firm behind Grand Theft Auto (345 million units sold), one of the most played and most important franchises of the past 20 years. Take-Two consists of two wholly owned labels, Rockstar Games and 2K.

Not only is the firm well positioned to capitalize on the success of GTA, but is also able to continue diversifying its revenue beyond its signature franchise. The gaming company, like its peers, benefits from the explosive demand for consoles, re-emergence of PC gaming, and the growth of mobile gaming.

Take-Two focuses on the higher end, investing heavily in the higher-budget blockbusters and boasts a marketing advantage -- both in terms of budget and network -- over independents to support its titles. “Over the past 10 years, the firm has established new franchises such as Borderlands while reinvigorating older ones like Xcom,” says a Morningstar equity report.

Take-Two’s largest annual franchise, NBA 2K, is the king of the sports gaming hill both in the U.S. and China, videogaming’s largest markets. “We expect the company to continue to invest in new intellectual property and to fund its development via sequels and expanding its core franchises onto mobile platforms,” argues Macker, who pegs the stock’s fair value at US$184.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Activision Blizzard Inc75.16 USD0.54Rating
Electronic Arts Inc124.71 USD-1.11Rating
Take-Two Interactive Software Inc102.06 USD1.26Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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