Why consider video game stocks? If I had to boil it down into one word, it would be “culture.” Allow me to explain.
For the longest time since the inception of digital entertainment, video games represented the near-exclusive domain of friendless nerds. If you wanted to have a partner in life, you kept that stuff to yourself. But somewhere along the line, video games essentially became universal. In fact, if I had to point to a transition point, it was when females became interested in the endeavor.
Frankly, that changed the game. Basically, you can have your cake and eat it too. And what good cake it is. According to Grand View Research, the global gaming market size reached a valuation of $217.06 billion in 2022. By 2030, the sector could be worth $583.69 billion, representing a compound annual growth rate (CAGR) of 13.4%.
Something tells me that this estimation is understated. Whatever the case, the sector is hot. Here are three video game stocks to consider.
Electronic Arts (EA)
One of the biggest names in video game stocks, Electronic Arts (NASDAQ:EA) may not be loved within the gaming community itself. However, there’s no denying that the company is a sector powerhouse. What makes EA unique – and not just distinct – is that it holds prime licenses. Because of these licenses, it’s able to develop “official” games of storied sports leagues or entertainment content franchises.
That’s also what makes EA sometimes hated among true gamers. Because the company has a monopoly of sorts when it comes to these licenses, it can act very cynically. With certain franchises, management knows that people will keep buying no matter what. As a result, it generally prints consistently solid financial performances (although the first-quarter miss was a recent anomaly).
From an investor’s perspective, though, cynicism is beautiful. In the trailing 12 months (TTM), EA generated earnings per share of $4.67 on sales of $7.56 billion. For the current fiscal year, experts anticipate a 6.4% lift in EPS to $7.36. Revenue could hit $7.51 billion, implying a 1.1% gain. However, given the already-strong performance, the high-side estimate of $7.74 billion may be likelier.
Nintendo (NTDOY)
A classic idea among video game stocks, Nintendo (OTCMKTS:NTDOY) is an intriguing idea for its family friendly focus. Notably, many gaming developers are targeting the adult audience. They’re offering gritty titles that focus on realism and graphic imagery. From an adult’s perspective, such offerings add a level of fantasy and immersion that you don’t get from, say, blockbuster films.
However, we shouldn’t forget that gaming is also supposed to be fun. Many if not most of the classics are geared toward children and Nintendo arguably has this segment cornered. From familiar characters to popular franchises that have stood the test of time, the company is in a position to target a new generation of youth.
Financially, what makes NTDOY stock compelling is the overall valuation. Right now, shares trade at a price/earnings-to-growth (PEG) ratio of 1.01X. Per Gurufocus, the sector median stands at 1.24X. While Nintendo isn’t exactly destroying the competition financially, it’s still holding its own. While sales growth could use some improvement, the gaming giant is consistently profitable.
Unity Software (U)
If you want to dial up the risk-reward profile of your video game stocks, look no further than Unity Software (NYSE:U). Despite carrying a moderate buy consensus view, it’s risky. For one thing, two analysts within the past three months have issued a sell rating against U stock. More importantly, the underlying market performance has been utterly putrid.
Frankly, you need to be careful with Unity. Still, what makes the idea intriguing is its relevance. The company provides a platform for gaming developers to create and monetize their content. Further, the underlying engine is widely used within the industry. It also offers applications beyond gaming such as in film and architecture.
Another factor that’s intriguing is the valuation. Right now, U stock trades hands at 2.8X trailing-year sales. In the past year, however, the market accepted a valuation of 6.94X. Theoretically, then, Unity could grow into its prior multiple, making the idea enticing.
Admittedly, analysts see revenue declining 16% in fiscal 2024 to $1.84 billion. However, the top line could pop up to $2.01 billion in the following year.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
