The video games industry has become a force in entertainment. Long gone are the days playing Pac-Man at the local arcade. The industry’s revenue in 2020 was estimated to be nearly $180 billion. To put that figure into perspective, the entire global film industry’s revenue was $100 billion in 2019. In the US, more than 214 million people play video games one hour or more per week and 75% of households have at least one person who plays.
The rise of video games was happening well before COVID, but the coronavirus pandemic drove it into hyperdrive. People were stranded at home and turned to video games for entertainment. And it’s not just kids that are playing, adults are active participants as well.
The VanEck Vectors Video Gaming and eSports ETF (ESPO), which tracks gaming stocks, soared 110% from March 2020 to March 2021. That figure is almost double the S&P 500’s return of 66%. While the industry has pulled back some, its long-term growth drivers remain. With new technology such as virtual and augmented reality and games becoming more popular on our smartphones, the industry has plenty of growth ahead. In this article, I will evaluate 3 top video games stocks at the moment: Electronic Arts Inc. (EA), Activision Blizzard Inc. (ATVI), and GRAVITY Co. (GRVY).
History of Video Games
The video game industry is involved in the development, marketing, and sale of video games. The very first interactive electronic game was the cathode-ray tube amusement device in 1947. The device simulated an artillery shell arcing towards targets. A player was able to control the shell by adjusting knobs to change the trajectory.
Two more games followed in the 1950s. In 1952, British professor A.S. Douglas created OXO., also known as tic-tac-toe, and in 1958, William Higinbotham created Tennis for Two on a large analog computer. In 1962, Steve Russell at MIT invented Spacewar!, a computer-based video game. Then in 1967, Ralph Baer, a developer at Sanders Associates, led the invention of a prototype multiplayer video game system that could be played on a television. It was called The Brown Box.
Baer is considered the “Father” of video games as his game led to a commercially viable industry in the 1970s. He licensed the device to Magnavox, which launched the Odyssey, the first video game home console in 1972. One of the Odyssey’s games became the inspiration for Atari’s Pong, the first arcade video game. This created an industry of both arcade games and home consoles that were essentially clones of Pong.
The industry became saturated and led to the video game crash of 1977. However, the industry bounced back with Taito’s Space Invaders in 1978, which led to the golden age of video arcade games. Arcades were located in shopping malls, storefronts, restaurants, and even convenience stores. Space Invaders was also licensed for the Atari 2700 home console during this time.
The industry crashed again in 1983 due to market saturation and the burgeoning personal computer industry. This changed when the Nintendo Entertainment System hit the market in 1985. The console was a huge success, with children begging their parents for one. Nintendo (NTDOY) was also responsible for the first significant handheld device, the Gameboy.
Due to technological innovations, the gaming industry increased through more advanced consoles such as the Sony (SONY) PlayStation and faster processing speeds, and 3D graphics cards on personal computers. The Microsoft (MSFT) Xbox followed in 2001. Over the past twenty years, more advancements and new gaming products have been a boon to video game makers.
Types of Gaming
Console gaming is the most well-known type of gaming. Originally consoles had simple joysticks to run games such as Pong. Now, consoles, such as the PlayStation and Xbox, have microchips that process images for 8K television screens.
While many gamers like to play on consoles, others prefer to play games on their PC. Computer manufacturers even sell computers specifically designed for video games. These computers have more memory and much higher graphic capabilities for immersive video games.
As more people use their smartphones in place of other electronic devices, mobile gaming has been on the rise, with almost half of the gaming industry’s market share. Mobile games are popular due to the relative ease of playing anywhere.
Cloud gaming has also entered the industry. Instead of plugging a video game disk into a console or your computer, you can choose games in a library of video games in the cloud. You can play on your phone, on a tablet, or even through your console.
Virtual and Augmented Reality Gaming
Another new advancement in the industry is virtual reality and augmented reality. Virtual reality immerses you in the game by putting you in it. While wearing a headset, you feel as though you are inside the game itself. Augmented reality adds digital objects into real life. This is done through headsets or even your phone, as we saw with Pokemon Go a few years back.
The final type of gaming is streaming. This is when gamers live stream their games to platforms such as Twitch and YouTube. People subscribe to watch these games. This has even led to a new industry called eSports, where people watch professional gamers compete.
Even with 50 years under its belt, the gaming industry is just getting started. By 2026, the gaming industry is expected to reach a value of $295 billion
Video games have gone from large cartridges to digital downloads. The advancements in technology such as virtual reality and better graphics cards create a more immersive user experience.
The sheer number of smartphone users has led to a vast untapped audience for mobile gaming. The rise in eSports and video game streaming is in its infancy. The industry currently stands to gain from three main catalysts. The first is the launch of the most recent consoles as both SNE and MSFT launched their latest PlayStation and Xbox consoles at the end of last year.
Next is the adoption of augmented reality and virtual reality headsets. This could lead to better player engagement. The third is the rise of mobile gaming and free-to-play business models, which generate revenue through in-app purchases and in-game advertising. This is all great news for video game makers, which stand to benefit the most.
Video Game Stocks in 2021
Electronic Arts Inc. (EA)
EA is one of the world’s largest third-party video game publishers. The company has transitioned from a console-based video game publisher to one of the largest publishers on consoles, PC, and mobile. It owns several large franchises, including Madden, FIFA, Battlefield, Apex Legends, Mass Effect, Dragon’s Age, and Need for Speed.
The company has been expanding its margin due to a higher percentage of revenue from higher-margin digital sources. EA is also benefiting from the latest generation of consoles and the growth in the mobile gaming space. The firm is focused on monetizing its users beyond the initial game sale by expanding the use of multiplayer options and releasing downloadable content. EA also dominates the sports genre of gaming, accounting for almost half of all sports game sales.
EA recently announced its plans to acquire Glu Mobile (GLUU), which should help with mobile market growth. The stock has an overall grade of C, which translates into a Neutral rating in our POWR Ratings service. EA has a Value Grade of B, which makes sense since its forward P/E is 23.09. The company has a healthy balance sheet leading to a Quality Grade of B. As of the most recent quarter, the company had $6.7 billion in cash compared to only $600 million in short-term debt.
We also grade EA based on Growth, Momentum, Stability, and Sentiment. You can find those grades here. EA is ranked #7 In the Entertainment – Toys & Video Games industry. While we don’t recommend EA due to its Neutral rating, you can find top stocks in the industry by clicking here.
Activision Blizzard Inc. (ATVI)
ATVI was formed in 2008 by the merger of Activision, one of the largest console video game publishers, and Blizzard, one of the largest PC video game publishers. The combined firm remains one of the world’s largest video game publishers. The company’s portfolio includes World of Warcraft and Call of Duty, two of the most profitable games in history.
The company has been gaining on higher engagement due to the stay-at-home trend and the release of new consoles. ATVI is also poised to benefit from developing new versions of its existing franchises and introducing new games such as Hearthstone and Overwatch. Like EA, ATVI is focused on monetizing its users beyond the initial game sale by expanding the use options and releasing downloadable content. This provides additional income for the company.
ATVI should also benefit from increasing disposable income in emerging markets. The company has an overall grade of C or a Neutral rating in our POWR Ratings service. It has a Sentiment Grade of B, meaning that the stock is well-liked by analysts. According to the StockNews Price Target feature, thirty out of thirty-four analysts have issued a Strong Buy or Buy rating on the stock. ATVI also has a Quality Grade of B due to its cash balance of $9.3 billion as of the end of March. This is more than enough liquidity to cover $3.6 billion in long-term debt.
You can access ATVI’s Growth, Value, Momentum, and Stability grades here. ATVI is ranked #9 in the Entertainment – Toys & Video Games industry.
GRAVITY Co. (GRVY)
GRVY is an online and mobile games developer and publisher based in Korea. Its principal product, Ragnarok Online, is an online game available in more than 90 markets. The company’s gaming portfolio also includes Requiem, Dragonica, and Ragnarok Clicker. The company generates revenue from online games, mobile games, and character-based merchandise and animation.
The company should see continued growth by expanding into other countries in South East Asia such as Taiwan, Thailand, Indonesia, and Vietnam. GRVY is also expanding its portfolio by partnering with the NBA for mobile gaming. This should increase awareness of the company in the United States. The company is also creating a baseball game based on the Chinese Professional Baseball League.
GRVY has an overall grade of B, which is a Buy in our POWR Ratings. The company has a Growth Grade of A, which makes sense as earnings have grown an average of 62% over the past three years. GRVY also has a Value Grade of A due to a trailing P/E of 12.82 and a Price to Sales of 1.98. We also provide grades for GRVY based on Momentum, Stability, Sentiment, and Quality, which you can find here.
The company is ranked #3 in the Entertainment – Toys & Video Games industry.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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