In the wake of the latest growth stock sell-off, I’ve been reviewing my equity opportunity sets across the market sectors and subsectors that I cover, including digital advertising, e-commerce, and video games. For now, I’d like to focus specifically on that latter segment of the market. The upshot: In general, I remain positive on the future of gaming and find a number of the stocks to be potentially attractive investment plays as of this writing.
Many of these stocks outperformed amid the height of COVID-19 and the widespread physical lockdowns triggered by it — to no one’s huge surprise really, because many people were more or less “stuck” at home for months on end, with ample time (and desire) to indulge in leisure activities like gaming that they might not be able to partake of under more “normal” societal conditions. But, and again not that surprisingly, many of the same stocks have underperformed this year as much of the world (thankfully) has begun to shed or loosen the pandemic-induced shelter-in-place orders, business closures, travel restrictions, and so on.
Why I’m bullish on video game stocks
Interestingly, however, my research and anecdotal evidence suggest that the amount of time global consumers have actually spent on gaming entertainment over the past several months has not fallen nearly as much as the stocks themselves. For this reason and others, I believe another sustained period of healthy business growth and share price outperformance could be in the offing for many gaming companies, following a very challenging period for most of them.
Not only has consumer demand for these companies’ products stayed fairly resilient, but other ingredients also appear to be in place for a potential rally in their stock prices. New gaming and monetization models are emerging around video game creators, influencers, and non-fungible tokens (NFTs), while 5G technology is enabling companies to deliver a better, more seamless cloud gaming experience. The “next generation” of gaming is starting to take shape, with some of the greatest successes thus far just beginning to reach the public markets.
While the evolution of the industry from here is hard to forecast with any precision, I think it’s becoming increasingly clear that the quantities of both time and money that consumers are willing to invest in so-called “immersive entertainment” — any interface or platform that pulls the user into another world, real or virtual — are poised to continue rising in the period ahead.
Don’t count out the winners of the past
With the rapid innovation being driven across the gaming industry, I suspect the market will be inclined (and to some degree, already is) to write off the big winners of the past as being ill-equipped to navigate today’s transitional environment. I think that would be a mistake. From mobile gaming to “free-to-play” games, previous paradigm shifts have demonstrated that the best of the industry incumbents tend to be able to adapt to new game types, new form factors, and new business models. In my view, investors who dismiss or underestimate the gaming leaders of the past may be doing so at their own risk.
Bottom line for the gaming industry
I believe now is a good time to dust off the old video game console and take a fresh look at some of the video game stocks that have been languishing in the “out-of-favor” bin.