The video game market has long abandoned the family basement. Now, it – and video game stocks – get plenty of respect.
Consider that over the past few months, several video game companies enjoyed blockbuster starts to their publicly traded lives. For instance, in January, Playtika (PLTK (opens in new tab)) launched its initial public offering (IPO) by selling 69.5 million shares at $27, much higher than its projected range of $22 to $24. More recently, Roblox (RBLX (opens in new tab)) directly listed on the New York Stock Exchange at a reference price of $45 per share, and was driven 54.4% higher on its first day of trading.
That follows a burst of pandemic-fueled growth in video game companies' businesses (and their stocks) last year. According to IDC, 2020's global video game revenues are expected to have grown by 20% to $179.7 billion.
"Video gaming had a tremendous year in 2020," says Ed Lopez, head of ETF product at VanEck, during a recent virtual media roundtable. But he adds that there is a "longer-term, persistent trend happening within the video gaming and esports space."
Catalysts for continued growth ahead include "games-as-a-service," where players spend more on in-game items and upgrades; consumers becoming more accustomed to monthly subscription passes; the rise of esports; and the rise of social and cloud-based gaming.
Many video game stocks ran hot through 2020 as sales went through the roof, but they're starting to cool off amid a rotation into "recovery stocks." While some remain preciously valued, a continued dip could provide a better entry point for investors looking to harness their longer-term potential. Read on as we explore five of the best video game stocks on the market.
Data is as of market close on March 11. Forward price-to-earnings (P/E) data provided by Morningstar.
- Market value: $71.1 billion
- Forward P/E: 25.6
Activision Blizzard (ATVI (opens in new tab), $92.94) is one of the largest video game developers in the world. Its core franchises – which include Call of Duty, World of Warcraft, Candy Crush and Overwatch – are household names, which is no mean feat in an intensely competitive market. Activision titles are played on consoles, personal computers and mobile devices.
The pandemic buoyed strength in core titles and new releases, reflected in the company's latest quarterly results, writes Wedbush Morgan analyst Michael Pachter. Call of Duty doubled its net bookings (net amount of products and services sold) in 2020, and World of Warcraft: Shadowlands sold 3.7 million units on its first day globally, becoming the fastest-selling PC game of all time. King (maker of Candy Crush) notched its best full year performance since it was acquired by Activision in 2016.
Pachter, who rates ATVI at Outperform (equivalent of Buy), raised his 12-month price target from $104 per share to $125, which implies 34% upside from current prices. He also predicted "outsized" earnings-per-share (EPS) growth going forward based on the company's strong pipeline, acceleration into mobile games, strategy to retain new and reengage existing players, as well as scaling of advertising for King.
He's among several other analysts that list ATVI among their best video game stocks to buy. For instance, Argus Research analyst Joseph Bonner also recently raised his 12-month price target, from $102 per share to $122 (31% upside), hiked his 2021 non-GAAP earnings estimates and maintained his Buy rating.
While the obvious question is whether the company can continue to do well as people stop sheltering at home, he notes that the latest releases of its two most important franchises – Call of Duty and World of Warcraft – continue to do well. Also, Activision's pipeline of games remains "robust" and it is expanding into other types of gameplay in the casual and mobile genre, enabled by King.
Bonner says management believes it only commands 10% of the video games market, which is growing by 20% per year. This pace is an "extraordinarily high growth rate that, if sustained, would support significant growth at Activision," he says. Also, Activision embarked on initiatives to generate new revenue streams, including professional e-sports tournament play, pay-per-view and consumer products.
- Market value: $37.3 billion
- Forward P/E: 21.7
Electronic Arts (EA (opens in new tab), $131.34) is a global leader in video game development with a deep catalog of popular titles including the franchises of FIFA, Star Wars, The Simpsons and The Sims, among others.
It's about to get even bigger, announcing in February that it would acquire Glu Mobile for $2.4 billion. The acquisition marks a "significant strategic turn for EA" and boosts its exposure to the rapidly growing mobile-casual game market, says Argus' Joseph Bonner. He says Glu is expected to increase EA's mobile games revenue by 60%; EA would expand the overseas reach for Glu, which currently gets 80% of its revenues from North America.
Raymond James analyst Andrew Marok believes the Glu acquisition is a good one for Electronic Arts. Since there is limited overlap between EA's and Glu's games, they can expand their gamer audience together. Glu has focused on mobile casual games such as Design Home, Covet Fashion, and Kim Kardashian: Hollywood. EA's mobile games center on sports and Star Wars. The marriage also lets Glu tap into Electronic Arts' more robust marketing and distribution resources, while EA can learn how to bring casual experiences to its sports games.
UBS also lists EA among its Buy-worthy video game stocks and gives it a 12-month price target of $170 (29% upside). Analyst Eric Sheridan says the company's recent M&A activities mean management is "making a broader strategic decision to align the business with a mix of cross-platform play opportunities and overall mobile gaming industry growth." EA's execution vis-à-vis capital allocation will be a key driver for the stock's "outperformance" in coming years, he said.
- Market value: $800.3 billion
- Forward P/E: 36.2
Chinese juggernaut Tencent (TCEHY (opens in new tab), $89.28) is the world's largest video game stock by revenue. The conglomerate not only releases its own games, but it has ownership stakes in many popular video game companies globally as well.
It owns Riot Games, which developed League of Legends, the most popular PC game in the world, according to PC Gamer (opens in new tab). Tencent also has a 40% stake in Epic Games, which developed the blockbuster game Fortnite. It has an 84% stake in Supercell (Clash of Clans), and an 11.5% stake in Bluehole, the maker of PlayerUnknown's Battlegrounds. Other investments include Grinding Gear Games (80%), Ubisoft (5%) and even Activision (5%).
UBS analyst Jerry Liu said Tencent's existing blockbuster games have continued to "perform well" and gamer engagement has remained despite folks returning to work and school. He sees Tencent delivering revenue growth in the mid-20% level and EBIT (earnings before interest and taxes) gains in the high-20% range for at least the next two years as a result of strong mobile gaming trends, and opportunities in ads and cloud.
"We see strong mobile gaming growth in China and abroad driven by multiple blockbusters, which should also improve Tencent overall margins," he says. "Cloud growth is starting to improve. Long term, online media and e-commerce monetization could help drive growth."
Liu also noted Tencent's "formidable ecosystem in China." It operates the largest online community in communication (QQ IM, Weixin/WeChat), social networks (Qzone), online games and media (QQ.com, microblog, video). Online games comprise 30% of revenue.
Moreover, Tencent has shown that it knows how to "localize popular international games and create blockbuster mobile games from PC IP (intellectual property). The company is starting to do the same in international markets leveraging strong Western IP from partners," he added.
- Market value: $11.0 billion
- Forward P/E: 44.3
Zynga (ZNGA (opens in new tab), $10.21) is a social gaming company that offers free-to-play games with in-game purchases and ads. It developed solid franchises such as Farmville and Words With Friends, as well as titles based on the Game of Thrones and Harry Potter franchises, and it serves 134 million monthly active users.
Wedbush's Michael Pachter has an Outperform recommendation on the stock with a 12-month price target of $15 (47% upside). Indeed, Wedbush views it as one of the best video game stocks you can by, as signaled by ZNGA's placement on the firm's "Best Ideas" list.
Wedbush praises Zynga's ability to build iconic long-lasting franchises, integrate studio acquisitions that are "highly accretive" to earnings, and "uniquely benefit" from Apple's (AAPL (opens in new tab)) upcoming privacy controls due to Zynga's increased independence in owning its own first-party advertising network.
UBS also has a bullish view of Zynga, citing the company's fourth-quarter 2020 performance that beat Wall Street's expectations on both revenue and the bottom line. Analyst Eric Sheridan noted that the gamemaker's October 2020 acquisition of Turkish casual game developer Rollic added to the robust performance in the quarter. Eight of Rollic's games have ranked first or second on lists of the most downloaded free app games in the U.S. Sheridan has a Buy recommendation on ZNGA and a $14.50 price target (42% upside).
Stifel analyst Drew Crum (Buy) recently raised his price target on the stock by a dollar per share to $14 (37% upside) after the company's better-than-expected quarterly results. He noted contributions from Rollic and Peak (Toon Blast), a Turkish mobile card game company whose acquisition closed in June 2020. Zynga, which is on the "Stifel Select List," is "continuing a theme of healthy engagement across mobile gaming."
Crum also wrote that Zynga's push into hyper-casual games, cross-platform offerings, international markets and advanced advertising technologies bodes well for the stock in the intermediate to longer term.
- Market value: $394.4 million
- Forward P/E: 14.7
SciPlay (SCPL (opens in new tab), $17.22) is a casino game developer behind such titles as Jackpot Party Casino and Gold Fish Casino Slots. Wedbush's Michael Pachter said the company's recently reported fourth-quarter results were "solid," with revenue and adjusted EBITDA "roughly in-line with our estimates.
"We view SciPlay shares as a compelling investment given the recent tailwind to engagement and monetization from stay-at-home, a history of solid execution, a long runway for continued growth, and a favorable valuation relative to its peers," he wrote. "The company's core business remains healthy, with its largest and most mature title, Jackpot Party Casino, growing 33% in 2020 and Gold Fish Casino Slots experiencing record revenue" in the quarter helped by new live ops events (real-time changes in a live game).
Pachter (Outperform) recently raised his price target from $22.50 per share to $25 (45% upside). He's bullish on SciPlay in part because of upcoming releases and its plans to expand into casual gaming; it is building a new studio that will deliver a new casual game in the second half of 2022.
Using data analytics and insights into users in social casino games, SciPlay should parlay these skills and data to further make inroads in the $20 billion casual gaming market.
Stifel also recently maintained its Buy rating on SCPL, calling the company's valuation relative to peers "attractive." Analyst Drew Crum says SciPlay stands to benefit from a favorable outlook on mobile gaming, and he thinks the stock could get a lift from potential catalysts such as new games and acquisitions.
In the latest quarter, SciPlay posted "healthy" revenue growth while adjusted EBITDA was just slightly below consensus estimates. At the end of 2020, SciPlay had $269 million in cash and no debt.
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