In this article, we discuss what’s wrong with the video game industry and the 10 stocks to watch in the sector. 5 Stocks to Watch.
The video gaming sector is one of the fastest-growing sectors of the market but this record growth has slowed in recent months. According to market research firm NPD Group, overall video game sales dropped for a second month in a row in December 2021, bringing to an end a six-month long streak of gains. The monthly sales were 1% down year-on-year, compared to a 10% year-on-year decline in November, representing a $7.5 billion dip keeping in mind the numbers for December 2020.
However, the overall spending in the video game sector remained high in 2021 despite a disappointing last two months. NPD claims that video game spending hit a record $60 billion in 2021, up over 8% when compared to 2020. Another gaming research firm, Newzoo, contends that the gaming market generated close to $180 billion in revenue in 2021, up over 1% compared to the pandemic-ravaged 2020.
Some of the top video game stocks to buy now according to hedge funds include Microsoft Corporation (NASDAQ:MSFT), Sea Limited (NYSE:SE), and NVIDIA Corporation (NASDAQ:NVDA), among others discussed in detail below.
Problems In Gaming Industry and Consolidation
Over the past few months, video game stocks have trailed the benchmark S&P 500. The share prices of many firms that operate in the sector are also near 52-week lows. Certainly, some of the pessimism relates to the overall state of the industry where new releases are not being received well at the market. Since the video game industry is cyclical by nature, with sales peaking around the holidays, this dip in popularity right around the holidays caused a huge dent in revenues for these firms.
A tightening of policies in China, where parents have been advised to limit the video game times of young children, has also hit sales since the Chinese market is the biggest video game market for many firms. To get through this lean period, many firms in the sector are looking towards mergers and acquisitions. These mergers, like the purchase of Activision by Microsoft and Zynga by Take-Two, both a few days apart from each other, are being touted as tech plays into the “metaverse”.
In addition to being possible metaverse investments, it is certainly true that both purchases advance the footprint of the buyers in the mobile gaming market. Newzoo estimates that mobile gaming revenue will climb to more than $116 billion in the next two years, up from just around $60 billion in 2019. In 2021, the global mobile gaming revenue was around $90 billion, up 4.4% year-on-year and representing more than half of the total global gaming revenue.
New Version of Old Stuff Not Working Anymore
Big video game firms are also having difficulty selling new versions of old games, a strategy that has proved successful in the past. For example, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) came up with the idea of a “Remastered” edition of the popular Grand Theft Auto game. The release of the new version flopped at the market. Combined with criticism around the Zynga purchase, the flop served to add insult to injury for Take-Two Interactive Software, Inc..
Activision Blizzard, Inc. (NASDAQ:ATVI) underwent a similar experience with the release of Battlefield 2042. Along with allegations of workplace misconduct against high-ranking officials at the company, the flop served as fodder for competitors to paint a “all is doom and gloom” scenario for Activision Blizzard, Inc. that brought the shares crashing down, paving the way for a blockbuster acquisition by software giant Microsoft.
The Microsoft purchase of Activision Blizzard, Inc. makes sense because it helps the former complement gaming hardware sales with software offerings. In the video gaming industry, gaming hardware, like the Xbox, can present a steady source of revenue for years. The same strategy, as the GTA and Battlefield flops indicate, cannot work as flawlessly in the software side. It also shields Activision Blizzard, Inc. from shareholder pressure regarding new offerings, making for a more balanced business/creative relationship with customers.
Our Methodology
The companies that operate in the video game sector and lost value in 2021 were selected for the list. The problems that these firms are facing are also discussed to provide readers with some additional context for their investment choices.
Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each firm.
Copyright: vadymvdrobot / 123RF Stock Photo
What’s Wrong With the Video Game Industry? Stocks to Watch
10. SciPlay Corporation (NASDAQ:SCPL)
Number of Hedge Fund Holders: 23
Percentage Loss in Share Price in 2021: 5.1%
SciPlay Corporation (NASDAQ:SCPL) develops and markets social games. The firm mainly focuses on casino-related offerings for mobile and web platforms. Since 2018, the company has grown revenue, through in-app purchases, at close to 20% annually. The company is using the surplus cash it is generating to fund acquisitions and grow the customer base. It also has low debt levels and thus a lower risk of bankruptcy as compared to peers in the gaming industry. SciPlay Corporation is also growing cash flow at a rate of 20% every year.
The strong fundamentals of SciPlay Corporation have attracted the attention of institutional investors. Among the hedge funds being tracked by Insider Monkey, New York-based investment firm TIG Advisors is a leading shareholder in SciPlay Corporation with 1.7 million shares worth more than $36 million.
Just like Microsoft Corporation, Sea Limited, and NVIDIA Corporation, SciPlay Corporation is one of the stocks that growth investors have their eye on.
9. Nintendo Co., Ltd. (OTC:NTDOY)
Number of Hedge Fund Holders: N/A
Percentage Loss in Share Price in 2021: 25.6%
Nintendo Co., Ltd. (OTC:NTDOY) is a Japanese firm that makes and sells electronic entertainment products. In November 2021, Macquarie analyst Yijia Zhai had downgraded Nintendo Co., Ltd. stock to Neutral from Outperform and decreased the price target to 48,400 yen from 65,000 yen, noting the weak quarterly results of the firm and a slow start to the holiday season as some of the main reasons behind the downgrade.
Even though it has not lived up to investor expectations in 2021, Nintendo Co., Ltd. has still attracted the interest of top growth funds. Among the hedge funds being tracked by Insider Monkey, New York-based investment firm ARK Investment Management is a leading shareholder in Nintendo Co., Ltd. with 117,316 shares worth more than $6.9 million.
8. Electronic Arts Inc. (NASDAQ:EA)
Number of Hedge Fund Holders: 53
Percentage Loss in Share Price in 2021: 5.4%
Electronic Arts Inc. (NASDAQ:EA) develops and sells games and entertainment content. Some of the famous games it owns include Battlefield, The Sims, Need for Speed, FIFA, Madden NFL, UFC, NHL, Formula 1, and Star Wars, among others. As the video game industry evolves to take advantage of trends such as subscription services, content downloads, microtransactions, and NFTs, Electronic Arts Inc. is well-positioned to benefit. The firm is now one of the largest pure play video gaming stocks on the market.
Electronic Arts Inc. has generated lots of buzz on Wall Street as well, even as growth stocks undergo a period of correction. At the end of the third quarter of 2021, 53 hedge funds in the database of Insider Monkey held stakes worth $1 billion in Electronic Arts Inc., compared to 56 in the previous quarter worth $2 billion.
7. Take-Two Interactive Software, Inc. (NASDAQ:TTWO)
Number of Hedge Fund Holders: 53
Percentage Loss in Share Price in 2021: 11.9%
Take-Two Interactive Software, Inc. develops and publishes interactive entertainment content. On January 10, Take-Two Interactive Software, Inc. had announced that it had bought Zynga, another gaming firm, in a deal worth $12.7 billion. The deal in this regard is expected to be complete by the first quarter of 2023. Take-Two Interactive Software, Inc. is aiming to expand in the mobile gaming market with the purchase. Mobile gaming is on track to represent over 50% of the gaming market in 2022.
Elite hedge funds hold large stakes in Take-Two Interactive Software, Inc. as it executes a plan to grow in the mobile gaming sector. Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Alyeska Investment Group is a leading shareholder in Take-Two Interactive Software, Inc. with 885,780 shares worth more than $136 million.
In its Q1 2020 investor letter, Sextant Mutual Funds, an asset management firm, highlighted a few stocks and Take-Two Interactive Software, Inc. was one of them. Here is what the fund said:
“We mentioned the Xbox, but gamers also need games. We invested in Take-Two last year on the thesis that gaming demonstrates attractive long-term growth opportunities and online distribution would reduce costs and improve margins. With a ready-made excuse to spend eight hours in front of a screen in the basement, such online game delivery must have helped Take-Two.”
6. Activision Blizzard, Inc. (NASDAQ:ATVI)
Number of Hedge Fund Holders: 80
Percentage Loss in Share Price in 2021: 25.8%
Activision Blizzard, Inc. provides interactive entertainment content and services. On January 18, software giant Microsoft acquired Activision Blizzard, Inc. in a deal worth $69 billion. Activision Blizzard, Inc. is the largest pure-play gaming stock on the market with brand names such as Call of Duty, Warcraft, Diablo and Overwatch under its belt. The share price of Activision Blizzard, Inc. jumped over 30% after the deal was made public.
There is plenty of institutional investor interest in Activision Blizzard, Inc.. At the end of the third quarter of 2021, 80 hedge funds in the database of Insider Monkey held stakes worth $4.2 billion in Activision Blizzard, Inc., compared to 78 in the preceding quarter worth $3.6 billion.
In addition to Microsoft Corporation, Sea Limited, and NVIDIA Corporation, Activision Blizzard, Inc. is one of the stocks that elite investors are buying.
In its Q1 2021 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and Activision Blizzard, Inc. was one of them. Here is what the fund said:
“The portfolio established a position in video game publisher Activision Blizzard. As a watchlist company we have followed Activision for several years. As a reminder the role of the watchlist is to allow us to focus on a select group of companies where we seek to observe important signals around either value latency, industry trends or management behaviour that portend attractive investment propositions.
Technology can often play a disruptive role in content, however video games are a clear beneficiary of technology, both in terms of more immersive and realistic gaming experiences as well as the monetisation opportunities this creates.
In order to benefit from these trends, video game publishers must be owners of unique IP. Activision Blizzard fits this bill perfectly boasting a portfolio which includes franchises such as Call of Duty, World of Warcraft and Diablo just to name a few.
The business is run by CEO Bobby Kotick, who together with Chairman Brian Kelly purchased the foundation assets for the company for US$400k in the early 1990s. Today Activision has a market capitalisation of over US$70bn. Over the last few years Bobby and his management team have refocused resources onto their best IP, with the goal of capitalising on the aforementioned industry tailwinds.
We saw the benefits of this in 2020 with the release of Call of Duty Mobile and Free-to-Play versions (with in game micro transactions) complimenting the traditional core console game. Engagement increased materially and due to the very favourable economics of content publishing, Operating Income more than doubled for the Call of Duty Franchise. Even adjusting for the impact of lockdowns, this is a phenomenal outcome.
Activision has 3-4 key pieces of IP with which they plan to repeat this playbook over the next couple of years. If they can replicate the success of Call of Duty, even in part, we see material upside to the free cash flow power of the business. Further, revenue sources are broadening which will move the profile away from a traditional lumpy annual release cycle of the old video game model towards one of a more recurring nature. This will transition Activision from a publishing to a services business, likely attracting a higher multiple than the current mid-low 20x FCF which is broadly in line with the market. To summarise, we see significant value latency and a pathway to double digit returns over the medium term.”
5. Roblox Corporation (NYSE:RBLX)
Number of Hedge Fund Holders: 50
Percentage Loss in Share Price in Past Six Months: 29%
Roblox Corporation (NYSE:RBLX) owns and runs an online entertainment platform. The stock has gained recognition in the past few months as a popular metaverse play. BTIG analyst Clark Lampen has a Buy rating on the shares with a price target of $133. In a recent investor note, the analyst highlighted the “impressive” user registration numbers of Roblox Corporation in the post-COVID economy. In December, Roblox Corporation had reported over 30% year-on-year user growth.
The strong user trends are one of many reasons why Roblox Corporation is popular among hedge funds. At the end of the third quarter of 2021, 50 hedge funds in the database of Insider Monkey held stakes worth $3.5 billion in Roblox Corporation, up from 49 in the preceding quarter worth $4.9 billion.
In its Q2 2021 investor letter, Guardian Fund, an asset management firm, highlighted a few stocks and Roblox Corporation was one of them. Here is what the fund said:
“The wonder-tale stories of children’s books show us that there are infinite possibilities of stories and worlds. The metaverse, the idea that describes the shared 3D spaces in a virtual universe, is enabling people to create fiction. Over the past six months, we initiated a new investment in Roblox. The firm was founded in 1989 by David Baszucki and Erik Kassel when they programmed a physics lab where students could study how cars would crash.
Today, Roblox has become a leading platform with a mission to build a human co-experience that enables billions of users to play, learn, and build friendships in the metaverse. Recent advances in cloud computing, computing devices, and machine learning, enable the materialization of the metaverse. Take what we have in virtual reality today and fast-forward a few decades. Humans will be able to experience unimaginable things and in a couple of millennia virtual economies are likely to become bigger than the physical trade on planet Earth.
Over the first quarter of 2021, Roblox reported 140% revenue growth, 42.1 million daily active users, and 9.7 billion engaged hours. The opportunity for this platform is massive.”
4. Zynga Inc. (NASDAQ:ZNGA)
Number of Hedge Fund Holders: 52
Percentage Loss in Share Price in 2021: 34%
Zynga Inc. (NASDAQ:ZNGA) provides social game services. It has been one of the hardest-hit stocks in the gaming industry over the past few months. On January 19, BTIG analyst Clark Lampen downgraded Zynga Inc. stock to Neutral from Buy without a price target, noting that the possibility of a high takeover offer for the firm did not look likely in light of the recent purchase of Activision by tech giant Microsoft.
Zynga Inc. has witnessed a flurry of hedge fund activity recently. At the end of the third quarter of 2021, 52 hedge funds in the database of Insider Monkey held stakes worth $603 million in Zynga Inc., up from 49 in the previous quarter worth $1 billion.
In its Q4 2020 investor letter, Artisan Partners Limited Partnership, an asset management firm, highlighted a few stocks and Zynga Inc. (NASDAQ:ZNGA) was one of them. Here is what the fund said:
“We also added to our position in Zynga. Our multiyear investment campaign in Zynga has been based on a new management team’s ability to drive steady growth in the company’s base portfolio of games, expand margins, reinvigorate the new game development pipeline and use its strong balance sheet to acquire complementary games and studios. Shares have been pressured in recent quarters, presumably because of investor concerns about the company’s moderating growth rate and Apple’s pending new privacy policy which will make it more difficult for Zynga to both efficiently acquire new players and sell advertising in its games. We believe the company has multiple growth levers it can pull in the periods ahead, including the rollout of new games, acquisitions, further penetration into international markets and entry into new gaming categories, to name a few. Furthermore, our research suggests the Apple privacy policy change is manageable for larger mobile game developers such as Zynga. Given our strong conviction in the profit cycle, we used recent weakness to add to our position.”
3. VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO)
Number of Hedge Fund Holders: N/A
Percentage Loss in Share Price in 2021: 5.7%
VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO) is an exchange traded fund that invests 80% of assets in securities of an underlying index that measures the return of firms that operate in the global video gaming and eSports sector. The fund can also invest in ADRs or foreign firms.
VanEck Vectors Video Gaming and eSports ETF has more than $606 million in net assets.
2. Global X Video Games & Esports ETF (NASDAQ:HERO)
Number of Hedge Fund Holders: N/A
Percentage Loss in Share Price in 2021: 9.6%
Global X Video Games & Esports ETF is another gaming fund that has suffered recently. It is an exchange traded fund that invests 80% of assets in component securities of the Solactive Video Games & Esports Index. The index is designed to measure the performance of firms that stand to benefit from the increased video game consumption across the world.
Global X Video Games & Esports ETF has more than $635 million in net assets. It has a year-to-date daily total return of -6.7% and a net expense ratio of 0.50%. The 52-week price range of the ETF lies between $24 and $37.
1. Embracer Group AB (publ) (OTC:THQQF)
Number of Hedge Fund Holders: N/A
Percentage Loss in Share Price in 2021: 56%
Embracer Group AB (publ) (OTC:THQQF) is a Swedish firm that develops and publishes interactive home entertainment content. It owns more than 240 popular game franchises including Saints Row, Goat Simulator, Dead Island, Darksiders, Metro, MX vs ATV, and Kingdoms of Amalur, among others.
On December 10, Barclays analyst Nick Dempsey lowered the price target on Embracer Group AB (publ) (OTC:THQQF) stock to SEK 81.50 from SEK 85.50. The analyst maintained an Equal Weight rating on the shares.
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This article is originally published at Insider Monkey.
