The gaming sector has had a bad 2019 so far, but why might it be worth playing the long game with your investments?
It is no secret that the video game industry took some hits in the early stages of 2019, with many analysts pointing the finger of blame at countries like China who have enforced stricter regulations on game approval. However, there is also the rise of free-to-play games — such as ‘Fortnite’ and ‘PlayerUnknown’s Battlegrounds’ (PUBG) — which have led to a saturated market of ‘Battle Royale’ games and audience fatigue.
For these reasons, the gaming industry faced a crisis at the turn of the year, with revenues heading for their first decline since 1995, according to Pelham Smithers Associates. You might then be wondering: why the hell should you invest in gaming now?
Despite all this doom and gloom, the video game industry closed out 2018 with a market value of $134.9 billion; an increase of 10.9% over 2017. Mobile gaming accounted for the majority of this market at 47% of the revenue total. However, it was the console market that stole the show with growth of 15.2% to hit $38.3 billion. This was helped along by big hitting titles such as ‘Red Dead Redemption 2’ from Take-Two Interactive (NASDAQ: TTWO), which broke records with a massive 17 million copies sold in its opening week alone.
Fast forward to April 2019, after a seemingly dismal 6 months for the gaming industry and Electronic Arts (NASDAQ: EA), one of the industries biggest players, has made a recovery from the start of the year, with other companies such as Activision Blizzard (NASDAQ: ATVI) and Take-Two Interactive soon following.
What do these companies have in common? Longstanding franchises such as ‘Call of Duty’, ‘Red Dead Redemption’, ‘Grand Theft Auto’ and ‘FIFA’ all have incredible brand equity and very loyal fan bases, which allows the companies to plan newer titles with this ever-flowing revenue stream.
With that in mind, it may sound risky to base investment on the hope that these companies will come out with big hitters, but there is a lot more to their projected long term success than just some flash in the pan game.
One of the most reassuring signs of projected growth is in the greater costs involved in making a video game these days, with EA and Activision both spending over $1 billion in R&D last year. This obviously gives the bigger companies the upper-hand in the industry, allowing them to swallow up the smaller, riskier companies who cannot compete and thus shoring up the market.
Of course, you can’t discount the rising influence of esports either — an industry that is predicted to top $1 billion in revenue this year.
This, paired with the ever increasing number of gamers (2.7 billion estimated by 2021), and the currently low valuation of stock prices all point towards an industry which will be on the rise in the long term.
The gaming industry is not going anywhere any time soon, so it may be time to cash in on this sleeping giant. Better graphics, virtual reality and hyper-realistic engines make for an exciting future in gaming. It is the usual suspects at the top for recommended companies to invest in, as these titans are best placed to take advantage of current market trends: Take-Two Interactive, Activision Blizzard and Electronic Arts.
It’s time to start investing in fun.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Activision Blizzard and Take-Two Interactive. Read our full disclosure policy here.