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The video game industry has boomed in recent years, with record sales and a growing gamer community offering a growing revenue opportunity.
US consumer spending on video game products surpassed $56 billion in 2022 and shows no signs of slowing down. The increase in video game sales can be attributed to advances in AI and virtual reality gaming, as well as the expansion of major media companies in the industry. These factors have increased consumer interest and propelled the growth of the market.
The following video game stocks offer access to a fast-growing and innovative gaming industry. With ongoing technological advances and digital transformation, the demand for video games is likely to continue to grow and offer promising investment opportunities.
One of the world’s largest video game publishers, Activision Blizzard (ATVI)’s franchise portfolio includes World of Warcraft (more than $8 billion in lifetime revenue) and Call of Duty (over 175 million copies).
The company is well positioned to maintain its industry leadership by creating compelling new versions of its existing franchises and introducing new experiences like Overwatch. “We expect Activision to continue to benefit from continued console demand, PC gaming revival and mobile market growth via King,” reads a Morningstar stock report.
While the sale of Activision Blizzard to Microsoft is pending as a number of jurisdictions continue to review the deal, “we still expect the deal to close in 2023,” says Morningstar equities analyst Neil Macker, who ranks the stock’s fair value Priced at $92, but caution “the timing [of acquisition] may be postponed to the second half of the year due to the extended official investigations.”
The game maker has taken advantage of the changing landscape of the industry, which is now split between big blockbuster games and smaller independent games. Macker predicts that 2023 will be a year of recovery for the company and projects that the company’s annual revenue will grow 7% from 2023 to 2027, to surpass $10.5 billion in 2027.
Chinese internet giant Tencent (TCEHY) is the world’s largest video game provider and owns the top-grossing mobile game: Honor of Kings. The company also owns and operates China’s largest social media super app, WeChat, which has permeated every walk of life in the country, from social media to streaming games and videos to ordering food and taxis.
Over the past decade, Tencent has capitalized on the opportunity presented by the industry’s shift toward mobile gaming. “The company owns some of the world’s most popular titles, such as Honor of Kings and PUBG Mobile,” according to a Morningstar stock report.
To date, games remain Tencent’s top source of monetization, with the segment accounting for more than 40% of the group’s operating income. “Tencent should continue to leverage its unrivaled access to user data and financial capital to create innovative, high-quality, long-lasting games with a mobile-first approach,” said Morningstar equity analyst Ivan Su, who pegs the stock’s fair value at US$90. Dollar.
While gaming and advertising remain Tencent’s top cash flow generators, the company’s investments in other areas like cloud storage, enterprise services, and enterprise software also offer long-term value creation potential. “Given the size of China’s economy and the proliferation of digital technologies, we suspect that enterprise technology will face tremendous opportunities and Tencent will most likely turn these services into recurring revenue streams,” Su said.
Electronic Arts (EA) is the world’s largest third-party video game company and owns some of the most well-known video games. His major franchises include Madden, FIFA, Battlefield, Apex Legends, Mass Effect, Dragon’s Age, and Need for Speed.
Over the years, EA has grown from a console-based video game publisher to one of the largest publishers across console, PC and mobile.
“Its portfolio of long-running franchises allows the company to monetize its intellectual property year over year by delivering content through sequels, expansion packs and downloadable content (DLC), such as annual releases of Madden (over 25 annual releases) and FIFA (over 20 annual issues),” according to a Morningstar stock report.
The company’s franchises have a loyal user base that allows it to distribute more content through direct digital channels, thereby dodging retailers, generating higher gross margins and increasing returns on invested capital. “These franchises also offer an opportunity to further monetize games via microtransactions,” says Macker, noting that both the Madden and FIFA games include an Ultimate Team mode, a virtual card collecting game.
The company will solidify its leadership position by developing compelling new versions of its existing franchises, creating new ones like Apex Legends, and acquiring established ones like Codemasters’ F1, notes Macker, who puts the fair value of the stock at $142.