Even hardcore video gamers have their limits. And that affects the growth of the best video game stocks.
Tired of being cooped up indoors for two years, gamers traded their controllers and the comforts of home for the outdoors, music festivals and other experiences as pandemic restrictions eased. The high cost of essentials such as food and gas also weighs on spending on games and accessories.
“The wave of new players and increased engagement from 2020 and 2021 has leveled off,” Mat Piscatella, a gaming industry analyst at NPD Group, which conducts market research, wrote in a recent report. “We are now seeing more entertainment opportunities vying for consumer attention and dollars.”
This shift is evident as several leading video game companies have reported earnings in recent weeks and noted that gamers spent less money overall in the second quarter. Some said gamers played less. Among those who see this trend:
- Sony Group (SONY)
- Microsoft (MSFT)
- Nintendo (NTDOY)
- Activision Blizzard (ATVI)
- Electronic art (EA)
Adding to the industry’s woes are production halts due to Covid lockdowns in China, limiting the supply of next-generation consoles. Sony’s PlayStation 5 and Microsoft’s Xbox Series X were launched two years ago, but are still hard to come by. Shortages of semiconductors also affect the supply of personal computers. The rollout of new games from big names has also slowed down as development teams adapted to working from home conditions under Covid.
Video gamers who spend less
Consumer spending on video game products in the US fell nearly 13% to $12.35 billion in the second quarter of 2022, compared to $14.13 billion placed in the same period a year ago, according to NPD. All but one spending has fallen: non-mobile subscription services. For the full year, spending is expected to fall nearly 9% to $55.5 billion. That represents a gain of less than 3% from pre-pandemic levels of $43.4 billion.
“Long-term growth trends persist,” said Neil Macker, senior equity analyst at Morningstar. “But the second half looks weak across the board and there is no question.”
Predicting growth for video game stocks
Amsterdam-based market research firm Newzoo has revised its forecast for global video game spending this year to $196.8 billion, compared to a previous estimate of more than $200 billion in response to the challenging environment. That’s only a 2% increase from 2021.
More than half of global growth is expected to come from games played on mobile platforms, up 5% to $103.5 billion. The personal computer market is expected to grow 1.6% to $40.4 billion, while console games will fall 2.2% to $52.9 billion. Newzoo predicts that global gaming spending will reach $225.7 billion by 2025, representing a compound annual growth rate of 4.7% between 2020 and 2025.
“This indicates our belief that the games market will continue to grow healthily in a post-pandemic world, albeit at a slower pace than during the pandemic,” said Tom Wijman, Newzoo’s chief games market analyst.
North America and Europe, which are considered “console first” gaming markets, are expected to show flat growth this year. “Strong mobile growth and, to a lesser extent, modest PC growth in these regions are the only factors compensating for a strong overall decline,” says Newzoo’s Wijman.
No one expected the high pace of spending growth seen in the past two years to continue. Still, no one could have predicted the magnitude of the slowdown that was unfolding, especially in an industry long thought to be somewhat isolated from wider economic downturns. developments. The most recent results emphasize the uncertain economic background, but also point to changing dynamics in the sector.
From “Hit-Driven” to “Free-to-Play” and “Live Services”
The industry has moved from the “hit-driven movie studio-style” model of 10 to 15 years ago, when people bought the latest console and the most popular games, Morningstar’s Macker says. Now, “live service” games in which content is regularly updated and which are typically “free-to-play” on mobile devices, with businesses relying on players to make in-game purchases and microtransactions, are all the rage.
The new post-pandemic developments are taking some in the industry by surprise.
Sony, maker of the popular PlayStation console, saw sales of its Gaming and Network Services division fall nearly 12% to 604 billion yen for the quarter ended June from a year ago, mainly due to declining software sales. Operating income fell 31% to 53 billion yen. Gaming and network services is Sony’s largest division, with revenues exceeding $24 billion in 2021. It lowered its full-year 2022 sales forecast from 3.66 trillion yen to 3.62 trillion yen, and lowered its outlook for the year. operating income up 16%, or 50 billion yen, to 255 billion.
The company said total playtime for PlayStation users fell 15% year-over-year in the fiscal first quarter and 10% in June from the same period a year ago. forecast.” Executives said that reduced Covid-19 infections in some of the key markets created more opportunities for gamers to go out as the reason for the decline.
Sony maintains its forecast for sales of 18 million units of its PlayStation 5 console for fiscal year 2022 and said it would take action to increase user engagement in the second half by releasing major software titles, the PlayStation5 more and promote the new PlayStation Plus subscription service.
Morningstar analyst Kazunori Ito insists Sony’s 4-star portfolio is resilient and undervalued. At $85.88, Sony’s stock recently traded at $85.88 per share, a 35% discount from its $133 fair value estimate.
Xbox maker Microsoft reported that total game revenues fell 7% in the fourth quarter of fiscal year 2022. Xbox hardware revenues were down 11%, while content and services revenues were down 6%, due to lower hours of play and lower revenues from third-party and first-party content, partially offset by growth in Xbox Game Pass subscriptions.
Microsoft’s crown jewel is its Azure cloud service, the centerpiece of the tech giant’s CEO Satya Nadella’s makeover, said Dan Romanoff, senior equity analyst at Morningstar. He considers Microsoft a wide-moat 4-star stock. It is trading at a 20% discount to its $352 fair value estimate.
Still, he points out, gaming represents 9% of Microsoft’s total revenue of nearly $200 billion and is growing at low double digits. Romanoff is “not confident that the gaming segment can generate excessive returns over the next 10 years.” The high costs traditionally associated with gaming networks—expensive high-end consoles, games, headsets and other accessories—may not be sustained for the next decade.
Microsoft is in the process of acquiring pure-play video game developer Activision Blizzard, whose titles include Call of Duty, World of Warcraft, Diablo and Candy Crush. Activision reported a 28% drop in revenue in the second quarter ended June 30, citing weak sales and a lack of user retention in its Call of Duty franchise. It was the second consecutive quarter of weakness. Only the King Digital Entertainment segment with its free-to-play games that monetize in-game sales and ads on mobile platforms posted year-over-year growth.
Morningstar’s Macker believes Microsoft’s acquisition of Activision will close, but likely not before mid-2023. In January, Microsoft agreed to pay Activision shareholders $95 per share in a cash transaction. Warren Buffett of Berkshire Hathaway (BRK.A) Bets the deal goes through: He bought 9.5% of Activision’s stock all spring when the price fell below the purchase price.
Nintendo’s sales fell nearly 5% in the fiscal first quarter of 2023 as manufacturing issues hampered the availability of its popular Switch console and mobile device sales fell nearly 17%.
Unit sales for the entire Nintendo Switch family of systems fell 22.9% year over year to 3.43 million units, the company said. “In the first quarter of last fiscal year, titles from other software publishers helped drive hardware sales, particularly in Japan, but with semiconductor shortages impacting manufacturing this first quarter, hardware sales declined year over year.”
On the bright side, digital sales grew 16% year over year, accounting for more than half of total software sales for the Nintendo Switch platform.
Another Pure play video game developer, Electronic Arts, was in the top spot of the pack. It focuses on live services and sports games, such as FIFA and Madden NFL, Battlefield and the latest Apex Legends, played on mobile devices. The company posted better-than-expected results for the first quarter of fiscal 2023, with revenue up 14% year-over-year, although total “net bookings,” as sales of digital products and services are known, declined 3% year over year. . Console net bookings were down 8% due to fewer game launches.
Morningstar’s Macker called it a “solid quarter,” but considers the three-star stock to be fairly valued. At a recent price of $133, Electronic Arts is trading close to its fair value estimate of $142 per share, limiting its upside potential.
Macker’s Best Guess: Take-Two Interactive Software (TWO)which completed its acquisition of Zynga at the end of May, putting it at the forefront of mobile gaming, where most of the industry’s profits are generated.
“The recently completed acquisition of Zynga has transformed the company into the traditional publisher that makes the most use of mobile,” Macker said. “The $11.2 billion deal is the largest video game acquisition ever closed, but we believe Zynga will deliver enough opportunities and benefits to justify its high price tag. A key opportunity is the development of mobile versions of Take-Two’s major franchises, including Grand Theft Auto.”
The company closed Wednesday at $129.81 a share, trading at a 30% discount from its fair value estimate of $185.00. Take-Two is the video game company with the best potential for appreciation, Macker argues.
Take-Two will report its first quarter 2023 results on August 8.
0 Comments