Securities.io is not an investment adviser, and this does not constitute investment advice, financial advice, or trading advice. Securities.io does not recommend that any security should be bought, sold, or held by you. Conduct your own due diligence and consult a financial adviser before making any investment decisions.
The Largest Entertainment Market
Video games have evolved in the past 3 decades from a nerdy activity for IT university students to kid toys to mainstream culture. And while non-gamers might not realize it, it is by far the largest entertainment industry. In 2022, the gaming industry as a whole made $182.9B, more than the music and movie industries combined.
These revenues are driven by mobile gaming (50% of the market), followed by console gaming (29%) and PC gaming (21%).
However, this metric may be slightly misleading, as some mobile “gaming” is closer to gambling than actual video games. So, for investors looking at video games, mobile gaming might be larger but also driven by a different dynamic than the rest of the sector and partially includes online gambling.
It is an industry increasingly dominated by a few large companies, either through mergers and acquisitions or through the influence of a few large distributors. In this article, we will review only pure-play gaming companies, while investors should also be aware of competitors like Microsoft, Tencent, Sony, etc., for whom gaming is an important but also a relatively small part of the whole business.
The sector has recently embraced aggressive monetization tactics, including DLC (Downloadable Content), microtransactions, loot boxes, etc. This has led to growing revenues but also some backlash and controversy, putting in question if the current trajectory of increasing revenues, production costs, and margins is sustainable.
Nevertheless, the industry is predicted to grow at 13.4% CAGR until 2030.
Source: Grand View Research
Top 10 Pure-Play Gaming Stock
One of the oldest video game companies, the Japanese console maker, has been an industry leader since the early era of arcade games. It has often been a trailblazer of new trends, from technical innovation to game design.
The company is also notorious for keeping very tight control over its products, with most of the games on Nintendo consoles either developed by Nintendo itself or by a third party with strict quality control from Japan.
Nintendo consoles occupy a niche of their own, usually priced a lot cheaper than its XBox and Playstation competitors, focusing on affordability, family-friendly games, and innovative gameplay. It is also the dominant actor in handheld consoles since the time of the GameBoy and with the current best-selling Switch blurring the line between traditional and handheld consoles.
These have historically been under-monetized, but this is changing recently, with the opening of Nintendo theme parks in partnership with Universal and the recent blockbuster Mario Bros movie. With an estimated budget of $100M, it paid back its production budget in the first opening weekend and ended with a total gross revenue of $1.3B.
Investors have been encouraged by this box office success to re-rate Nintendo IPs, with some people putting them on par with Marvel or Star Wars. Others are more cautious, considering the long history of Nintendo failing its next console release after a very successful one, causing some worries over the successor of the Switch.
EA is the holder of some of the most popular licenses in video gaming, including many sports licenses with well-selling yearly iterations of sports games (FIFA, NHL, etc.), the Sims, Apex Legend, Dead Space, Battlefield, Mass Effect, Dragon Age, Need for Speed, Crysis, Star Wars-licensed games, etc.
The company grew from the regular acquisition of game developers and currently brings together 24 different gaming studios.
The company has a somewhat mixed reputation with PC gamers as an acquirer that often kills the studios it acquires. It is selling very well in the console market, making up around 65% of total revenues.
While maybe not popular with the most active and vocal gaming community members, EA is a very successful company with mainstream gamers, able to prioritize and monetize effectively profitable licenses. It should grow its revenues by 25% year-to-year in Q1 FY 2024.
This is a good stock for investors looking for a good capital allocator and a company with control or access to some of the most valuable IP in video games outside of Nintendo and tech giants.
This Swedish video game developer has found success by going against the flow of most of the industry. When most developers have been trying to emulate EA's licenses toward more action-focused gaming, Paradox Interactive has instead carved out a very profitable niche in “grand strategy” and management sim games.
These games are often a lot less visual, almost abstract, and more focused on gameplay complexity and depth. This means a smaller user base but a very dedicated one, often playing thousands of hours on a single game.
This also allows Paradox to monetize its base games heavily through an aggressive DLC strategy, with ongoing development lasting several years after the release of the base version.
As a result, the “complete” version of a Paradox game can cost several hundreds of dollars in an industry where games have often stayed stuck at the $60 price tag for most of the decade.
Thanks to its strategic focus, Paradox is able to enjoy a quasi-monopoly in its niche. This does not mean it cannot be competitive with large developers either, as illustrated by the City Skyline license. Leveraging a poor reception from market leader & EA-backed Sim City's latest iteration, it has become the leading IP in the city-builder genre in just a few years.
Most recently, the company has announced its entry into the 4X strategy game genre, similar to the classic and best-selling Civilization series, with the title Millenia to be released in 2024.
So Paradox is a good gaming company for investors knowledgeable about gaming and willing to take a chance with a niche developer with a proven track record of developing a fanatic fan base and expanding into new genres opportunistically.
Take-Two is a very large developer, carried by a few extremely successful gaming IPs, contrasting with the more diverse roster of EA, for example.
Among these leading properties is Grand Theft Auto (GTA V is the second best-selling game in history, with 185 million copies sold!). Another Take-Two game, Red Dead Redemption 2, is the 8th most-sold video game ever, only behind Minecraft. It also owns the rights to the strategy game Civilization, the most selling in its category.
Finally, Take-Two acquired mobile developer Zynga in 2022 for $12.7B, famous for its Farmville Facebook games. Behind the reasoning for this acquisition, Take-Two mentioned that 10% of the world population play Zynga’s games every month.
Thanks to its incredibly large user base and the popularity of its flagship game, Take-Two should generate $1.2B in revenues in Q1 FY 2024, with Recurrent Consumer Spending (RCS) growing by 34% year-to-year.
Games like GTA V, still popular and very active 10 years after its release, are exceptional in an industry driven by the “next big thing”. This gives some visibility for investors, with 73% of Take-Two's income being from recurring consumer spending like in-game purchases and subscriptions.
And short of massive technical or design issues, investors can confidently expect the next iteration of Take-Two flagship licenses to sell well into the future, giving more visibility than with most gaming stocks.
A trend in gaming has been to focus on the adult and “mature” gaming market, following the aging of the gamer demographic. Roblox has instead captured the imagination of the younger audience, with 29% of users between 9 and 12 years old.
Roblox is played by 202 million people every month, and 20 million play daily. The monthly user number is very large and shows impressive player retention, as the game has been downloaded “only” 383 million times. The user base is also very international, with 70% out of the USA and Canada. However, most revenues are from the US & Canada (64%).
The platform is free but includes almost countless in-game transaction possibilities, including user-generated content.
Roblox revenues have more than tripled since 2020, with year-to-year growth slowly declining from its pandemic peak, from 100%+ in 2021 to 15-22% in 2023.
More than a video game, Roblox is essentially a social media platform for school-age children in the form of a video game. Its business model is extremely sticky and represents a strong investing moat. In many ways, Roblox is a successful tentative to create a meta-verse, at least for this demographic.
Roblox investors will want to check the game's lasting appeal with its core demographic getting older and potentially migrating to other games. An encouraging sign is the 17-24-year-old being its quickest growing demographic, showing the potential of Roblox to become a durable generational phenomenon.
Initially, a very small Polish developer, CD Projekt Red grew with its core license: The Witcher series. Launched in 2007, it brought to video game the popular, but somewhat unknown in the West, “Witcher” fantasy story from Polish author Andrzej Sapkowski.
The series' popularity with RPG (Role Playing Game) fans grew with each iteration. The Witcher 3 was the great breakthrough for CD Projekt, ranking as the 10th most-sold video game in history and 2nd best-selling RPG behind Red Dead Redemption 2.
The game was followed by a massive DLC acclaimed by fans as the “Best DLC in history” for its scale and quality. The Witcher would receive a high-budget Netflix series adaption, which would go on for 3 seasons.
It is crowned with this stellar and well-deserved reputation that CD Projekt announced a new license, Cyberpunk 2077, promising to be a science-fiction version of The Witcher, except bigger and better. The initial release, struggling with bugs, questionable design choices, and a botched port to PS4, damaged the company's reputation, especially considering how high the standards and expectations had been set.
Since then, CD Projekt has worked on fixing Cyberpunk 2077 (Steam reviews are back to 80% positive), repairing its reputation with fans, and launching new ambitious projects. The animated show Cyperpunk Edgerunner is also the highest-rated show ever on Netflix, rebuilding enthusiasm for the license and its universe.
CD Projekt is working on a new Witcher trilogy, remakes of the earlier and dated Witcher 1 & 2, a multi-player Witcher game (Project Sirius), as well as Phantom Liberty (offshoots of Cyberpunk 2077) and Orion (essentially Cyperpunk 2).
The stock of CD Projekt is yet to recover from the poor reception of Cyberpunk 2077. Still, the success of the Netflix series, the recovery of Cyperpunk 2077 rating, and the eager wait for the new releases show that CD Projekt still holds a lot of goodwill with gamers. It also demonstrates the value of its IPs, which are yet to be monetized into movies or other product lines fully.
So CD Projekt Red stock is for investors willing to take a risk and interested in a quality stock selling at a (temporary?) discount with strong growth potential.
The Japanese developer was instrumental in the early console gaming era with platformers like Contra and Castlevania. It also holds the license of cult classics like Metal Gear Solid and Silent Hill and the popular e-football series (former PES). Finally, it also controls the Yu-Gi-Ho license, which is associated with a popular collecting card game and is now turning 25 years old.
Konami licensing has evolved over time and is still important to video game culture, but less at the forefront than it used to be. Still, nostalgia is a powerful force, and the unique aesthetic of Konami games has been successfully modernized, notably the Castelvania licenses, including in a Netflix series considered one of the best Netflix anime series until Cyperpunk Edgerunners.
While Konami is also active in slot machines and fitness clubs in Japan, most of its profits (95%) come from digital entertainment. For Q1 FY 2024, revenues grew by 5,3% and operating profits by 13%.
Konami has not developed a new major video game license for a very long time now, but the existing ones are still solid and profitable. This is also one of the video game developers that has managed early on to monetize its IP through movies (Silent Hill).
So, it can be a stock for investors willing to bet that gamers rarely turn away from an IP they previously appreciated and might even pass that interest to their own children. And with more movies or other media adaptations possible down the road, especially Castlevania and Metal Gear Solid, considering the recent success of the Mario Bros movie and Hollywood's eagerness for fresh IP.
Capcom started as a manufacturer and distributor of arcade games in 1979. Since then, it has created many iconic games, like the Resident Evil series, Monster Hunter, Devil May Cry, and Street Fighter. In its 40-year history, Capcom has sold more than 500 million game units.
Video games represent 80% of the company’s revenues, with the other 20% of legacy arcade and collecting/gambling Pachinko machines, popular in Japan.
The company recently released Resident Evil 4, a remake of the 2005 game. It received critical acclaim and sold over 5 million copies. Among its top 10 most-sold games, 6 have been released since 2018, demonstrating the relevance of the company's brands.
This, in turn, has allowed the company to grow its income significantly, almost doubling since 2020 and with strong operating margins above 50%.
In the near future, shareholders of Capcom can look forward to a new Street Fighter live-action movie and TV series, with a production deal signed in 2022.
New quality games from the existing licenses and nostalgia for remakes of older games keep Capcom relevant and profitable. As long as this remains true, shareholders in Capcom can be assured that the company will stay profitable and, at the very least, grow with the overall gaming market.
Square Enix is, in theory, a gaming company with many brands in its portfolio, including Kingdom Heart, Dragon Quest, and the Chrono series.
But what is by far the largest revenue driver and face of the company is its Final Fantasy series, with a release of Final Fantasy 16 in 2023.
Final Fantasy (or FF for the fans) has come to represent the typical JRPG (Japanese Role Play Game) for many players.
At some point, Final Fantasy XIV was the most-played MMO in the world. Even in 2023, 13 years after its release, the game still has 1.6 million daily players.
In 2022, Square Enix sold many legacy brands to Embracer Group, including Tomb Raider, Deus Ex, Thief, and Legacy of Kain.
In 2020, the company published a remake of Final Fantasy 7, the most beloved iteration of the franchise. The remake is the first out of 3 games dedicated to cover the entirety of the 1997 Playstation game. The second part will be Final Fantasy VII Rebirth, scheduled for February 29, 2024.
The company has faced some headwinds with the release of Final Fantasy 16, with negative reviews by critics as beautiful graphically but hollow narratively. The company stock has somewhat suffered accordingly, falling back to 2017 levels.
This would not be the first time that one entry in the Final Fantasy series disappoints, with some previous entries in the 16-game-long series receiving a similar reception. It should, nevertheless, not cause durable damage to the brand.
Investors in the stock might see the current stock price weakness as an opportunity to buy at a discount and hope for the next iteration in the Final Fantasy series and Final Fantasy VII Rebirth in February 2024 to restore a somewhat battered but not shattered reputation.
Ubisoft is a Franco-Canadian game developer most known for its open-world Assassin Creed franchise. The license is well known for its consistent design and has had a major influence on other open-world games' design.
It also holds the rights to the city builder series Anno and Settlers, racing games The Crew, Price of Persia, and Far Cry. The company is also often contracted to create games for other IP holders, for example, James Cameron’s Avatar or Star Wars.
Ubisoft is looking to create new licenses, with the upcoming pirate RPG Skulls and Bones, as well as remakes for Splinter Cell and Prince of Persia and new Tom Clancy games.
The company has been on a winning streak lately, with The Crew Motorfest's recent release the biggest-ever launch in the franchise. This contrasts with a more despondent mood in January 2023, when Ubisoft CEO said, “We are clearly disappointed by our recent performance.”
The business has long been plagued by excessive debt and hostile takeover risks, recently alleviated by Tencent’s increasing its stake in Ubisoft. These concerns regarding the company's financial stability have wiped out much of its market valuation, falling back to 2016 and even 2008.
This might offer investors an opportunity to take the risk, considering that the top 3 best-selling Assassin's Creed games were released in 2017, 2018, and 2020, indicating that gamers are far from tired of the series.
The result of Assassin's Creed Mirage at the end of 2023 will likely be a catalyst for a stock price rebound or further weakness, depending on its performance.