The video game industry has been through a rough year in 2022. High inflation and worsening economic conditions have resulted in lower disposable income, and when budgets are tighter, people begin spending less money on unnecessary expenses such as video games. Even if they do not stop spending on games entirely, they may evaluate their purchasing behavior and decide to decrease spending levels, re-visit old games or play more casually.
Gaming market research company Newzoo projects that gaming revenue will decline approximately 4.3% in 2022 compared to the previous year. Breaking the market down into segments, Newzoo expects PC games will see revenue growth of 0.5% for the year. PC gaming’s resilience is driven by less reliance on new hits compared to console gaming, which is expected to decline 4.2%. While mobile gaming continues to take market share from browser PC games, its explosive growth and the more volatile revenue structures of many mobile games is expected to lead to declines of 5.6% in the Asia-Pacific region, 5.1% in North America and 3.5% in Europe.
This short-term correction will not last forever, though. Entertainment has long proven to be a valuable commodity, and free-to-play monetization and subscription models have added more resilience to this historically cyclical industry. The next couple of years should bring loads of new content as the latest PlayStation and Xbox consoles gain users. Mobile gaming should continue to grow as global access to smartphones improves, as people who did not previously have access to much technology are more likely to buy smartphones rather than PCs or gaming consoles.
With the gaming market downturn likely to be short-lived, or at worst following the general macroeconomic situation, let’s take a look at video game stocks that could be worth watching as they exhibit value characteristics.
Electronic Arts
Electronic Arts Inc. (EA, Financial) is the second-largest video game company by revenue and is the pioneering leader in interactive sports games such as Madden NFL and FIFA. In addition to its sports game leadership, it also owns several other highly popular assets like The Sims and Apex Legends. It has games available on PC, console and mobile.
The company has done a good job of growing its live services in recent years. Live services have become key to growth in the gaming industry as they turn games from one-time sales into year-round experiences with a wide variety of opportunities to sell new content, upgrades and in-game privileges. Electronic Arts expects live services to be a key contributor to expected total bookings growth of 6% in 2023.
The GF Value chart rates Electronic Arts as modestly undervalued. While the price-earnings ratio is a little high at 37.92, the forward price-earnings ratio based on analysts’ estimates is 15.30. The median historical price-earnings ratio is 31.76.
Nintendo
Nintendo Co. Ltd. (NTDOY, Financial), home to popular gaming franchises such as Pokemon, Super Mario, Animal Crossing and The Legend of Zelda, is a mostly console-based gaming company, though it has added mobile games in recent years. Due to the company’s hyper-focus on console gaming, it does not launch games for PC as that might decrease its own console sales and thus reduce profit margins.
Due to its focus on consoles, Nintendo is highly cyclical. Its most recent console, the Switch, was released five years ago, so the community is expecting news of a new console in development sometime in the next few years (probably in 2024 or 2025). Due to the current place in its development cycle, Nintendo is unlikely to display much in the way of growth for the near term, but it should rise on the hype and profits from its next console.
Even at a price-earnings ratio of 11.14, the GF Value chart rates Nintendo as just fairly valued, as its near-term results are not expected to be anything great. It is still worth keeping an eye on for the next development cycle, though, and it does offer a decent dividend yield of 3.65%.
Take-Two Interactive Software
Take-Two Interactive Software Inc. (TTWO, Financial) is a holding company that owns three main publishing labels: Rockstar Games, 2K and Zynga. Rockstar Games’ leading franchises include Grand Theft Auto and Red Dead Redemption, while 2K features Civilizations, Borderlands and the NBA games. Both of these studios are console and PC-focused with some mobile apps. Zynga, which was recently acquired, is mobile-focused and best known for Farmville.
The company is taking a hit due to having acquired Zynga at an unfavorable time, when the market was in the midst of a bubble. Now, mobile gaming is suffering declines in engagement and advertising due to the economic slowdown, leading investors to fear the company may have overpaid for Zynga. The acquisition will likely still generate good growth over time, it just may take longer now due to mobile gaming’s sensitivity to the economy.
Take-Two has posted net losses for the past two quarters, though analysts are expecting the bottom line to turn positive again next year. The GF Value chart rates the stock as a possible value trap due to the combination of share price declines and a negative bottom line, but as long as it can recover its profitability, it should move into undervalued territory.
