3 Cheap Videogame Stocks

Even as the year starts off with M&A deals, the space is projected to skyrocket to US$268 billion by 2025, and these companies might benefit.

Vikram Barhat 26 January, 2022 | 3:14AM
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Video gamer 

The year has barely begun and the videogaming market is already buzzing with action. Technological leaps and a swelling tide of consumer demand for mobile gaming have attracted attention from big tech players, triggering an M&A wave in the videogaming industry.

The year has already seen two major, multi-billion-dollar acquisitions aimed at capturing the lion’s share of the rapidly transforming global videogaming market, projected to skyrocket from US$178 billion in 2021 to US$268 billion by 2025. 

The following gaming powerhouses dominate the industry undergoing evolutionary changes including subscription plans and cloud gaming. These players have the wherewithal to rapidly innovate and differentiate their product offerings to stay ahead of the competition and technology curve.

Tencent Holdings Ltd ADR

 

Ticker

TCEHY

 

Current yield:

0.35%

 

Forward P/E:

26.25

 

Price

US$58.15

 

Fair value:

US$108

 

Value

45% Discount

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

***88

Data as of Jan 24, 2022

Tencent (TCEHY) is the world's largest video game vendor. Its stable of franchises include the world's top-grossing mobile game Honor of Kings, as well as PUBG, Clash of Clans, League of Legends, and Fortnite. Tencent also owns China's largest social media app WeChat.

Over the past decade, Tencent has capitalized on the industry shift toward mobile gaming with the world's most popular titles such as Honor of Kings and PUBG Mobile. “To date, games remain Tencent's primary monetization model— [an estimated] more than 40% of the group's operating income comes from this segment,” says a Morningstar equity report.

Although games and advertising will account for the bulk of Tencent's cash flow generation, its investments in cloud storage, business services, and enterprise software also offer long-term value-creation potential. “Given the size of China's economy and the prevalence of digital adoption, there are enormous opportunities ahead for enterprise technology, and Tencent will most likely become a formidable player in the industrial Internet space,” asserts Morningstar equity analyst, Ivan Su, who pegs the stock’s fair value at US$108. Wide-moat Tencent's ability to profitably monetize its network via games, music, advertising, fintech, and other services, indicates “that the business will generate excess returns on capital over the next 20 years,” says Su.

Activision Blizzard Inc 

 

Ticker

ATVI

 

Current yield:

0.58%

 

Forward P/E:

20.70

 

Price

US$79.99

 

Fair value:

US$92

 

Value

15% Discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of Jan 24, 2022

Videogaming major, Activision Blizzard (ATVI) is one of the largest PC video game publishers whose impressive franchise portfolio includes World of Warcraft (more than US$8 billion of lifetime sales) and Call of Duty (sold over 175 million copies over 12 years).

“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 Overwatch,” says a Morningstar equity report, adding that the company would continue to benefit from the ongoing growth in the mobile market.

“Like its peers, the firm is focused on engaging users beyond the initial game sale via extending the monetization window by expanding the use of multiplayer options and releasing downloadable content (DLC),” says Morningstar equity analyst Neil Macker

Both methods encourage gamers to stick with the original game longer and provide an income stream from the secondary market. “Activision has used DLC and multiplayer to extend the life of multi-billion-dollar franchises such as Call of Duty, and we believe franchises like Hearthstone and Overwatch can also sustain long-term success,” say Macker, who recently lowered the stock’s fair value from US$97 to US$92, prompted by the negative impact of the allegations of sexual misconduct at the high-profile video game company.

Tech heavyweight Microsoft plans to acquire Activision Blizzard for US$68.7 billion. However, Macker expects regulators to heavily scrutinize the deal, “given the recent anti-Big Tech fervour on both sides of the aisle in Washington.”

  Take-Two Interactive Software Inc 

 

Ticker

TTWO

 

Current yield:

-

 

Forward P/E:

25.13

 

Price

US$158.04

 

Fair value:

US$200

 

Value

26% Discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

****

Data as of Jan 24, 2022

Owner of popular labels Rockstar Games and 2K, Take-Two (TTWO) is one of the world's largest independent video game publishers on consoles, PCs, smartphones, and tablets. Its well-known franchises include Grand Theft Auto (345 million units sold), NBA 2K, Civilization, Borderlands, Bioshock, and Xcom.

“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 will continue to benefit from the secular trends such as “high demand for consoles, the ongoing revitalization of PC gaming, and the growth of mobile gaming.”

Take-Two has capitalized on the shift within the industry toward two-tier market comprising major AAA blockbuster titles (at the higher end of the market) and smaller independent games. The videogame behemoth focuses on the higher end, using its capital to fund the higher-budget blockbusters. Its largest annual franchise, NBA 2K, is the most popular sports game in both the U.S. and China.

“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,” says Macker, who pegs the stock’s fair value at US$200.

 As part of a major thrust into the mobile gaming market, Take-Two recently announced plans to buy mobile game publisher Zynga in a US$12.7 billion deal. “We expect the deal is likely to be completed but the close may be in the second half,” says Macker.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Activision Blizzard Inc77.99 USD0.36Rating
Take-Two Interactive Software Inc123.28 USD0.98Rating
Tencent Holdings Ltd ADR44.03 USD3.43Rating

About Author

Vikram Barhat

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

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