Video-game stocks have been on quite a tear over the last five years. Share prices of the leading U.S.-based game makers -- Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two Interactive Software (NASDAQ:TTWO) -- are up anywhere from 250% to 600%. Part of this performance can be attributed to expanding profitability from growing sales of digitally-delivered content. But a recent Nielsen Holdings survey shows a more powerful dynamic at play, here.
In recent years, the number of gamers has steadily grown. In 2018, 66% of the U.S. population over age 12 were gamers. That's up from 58% in 2013, according to Nielsen.
Below, I'll review some of the key factors driving this trend, as well as some of the top companies benefiting from a booming gaming industry.
New game platforms
Nielsen credits the success of Nintendo's (NASDAQOTH:NTDOY) Switch and a plethora of new games that have recently come out with driving interest in gaming across the general population. In 2017, more than 7,000 games were released on Steam, the popular online game store for PC gamers. That dwarfs the number of PC games released in previous years. Obviously, game makers are not going to risk losing millions of dollars developing a new game if they don't think there is enough demand in the marketplace.
A greater supply of games increases the chance that everyone will find a game they want to play, and therefore grow the installed base of players. There are plenty of choices for the hardcore gamer, but a flood of casual games on mobile devices has likely created new gamers in recent years, too.
The growth of Apple's iPhone and iPad paved the way for the strong growth in mobile game sales happening right now. Last year, Apple ranked third on the list of top public companies that generate the most revenue from video games, according to industry researcher Newzoo.
Beyond the growth of gamers worldwide, here are four other trends I believe are really lighting the fire under people's desire to play video games.
The last few years have seen tremendous creativity in game design. Two noteworthy examples are Activision Blizzard's Overwatch and Epic Games' Fortnite -- partly owned by Chinese tech giant Tencent. These games introduced a unique twist on the first-person shooter genre, which has historically been dominated by military themes. Most importantly, they have done more to bring female gamers to the hardcore shooter genre than any other games in recent years -- maybe ever. Overwatch and Fortnite feature a cartoonish presentation and a roster of in-game characters that reveal the creative and playful side of their developers at Blizzard and Epic Games. It's no wonder these are two of the most beloved games on the market.
A few of the unexpected benefactors of the exploding popularity of Fortnite have been Logitech International (NASDAQ:LOGI) and Turtle Beach (NASDAQ:HEAR), which make computer peripherals, such as gaming mice and headsets. On a recent conference call with investors, Logitech CEO Bracken Darrell spoke to the long-term implications of these popular shooters on the company:
We believe this trend of new engaging games will happen again and again over the years ahead, while the major esports games of today will continue to grow. But this engagement is not about a single game like Overwatch or fad. Gaming is a rare long-term secular and generational change.
2. Better graphics
Enabling this spurt in creativity are the leading graphics card makers -- NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD). Games are getting more cinematic and more immersive thanks to the ongoing advances in graphics technology being made by these companies, which make games more interesting both to watch and to play. NVIDIA's latest RTX graphics cards promise to take in-game realism to a whole new level.
Here's what NVIDIA CFO Colette Kress said during the company's first-quarter conference call earlier this year:
Gamers are increasingly engaging in social gameplay and gaming is rapidly becoming a spectator sport, while the production value of games continues to increase. This dynamic is fueling a virtuous cycle that expands the universe of gamers.
3. Game streaming
Millions of people visit Amazon.com's Twitch and Alphabet's YouTube every month to watch an esport event or watch their favorite personalities play games for hours at a time. Game streaming can be helpful in marketing trending titles to new audiences -- it's this dynamic that I believe caused Fortnite to go viral in 2018.
Consider this: More people watch gaming content than the combined viewership of HBO, ESPN, Netflix, and Hulu, according to SuperData.
4. The return of classics
Over the last few years, Nintendo and other game makers have rereleased classic games from years ago that tap into the nostalgia many former gamers have for their childhoods. Nintendo has released classic digital editions of the original NES and SNES consoles. The demand for these systems has been strong to the point that Nintendo had a difficult time meeting demand after launching the NES Classic in 2016.
Spurred on by the success of Nintendo's classic consoles, in December, Sony is launching the PlayStation Classic, which comes preloaded with original titles dating back to the original PlayStation console from the 1990s. What this trend shows is how the gaming industry is starting to mirror the movie industry in terms of having a vault of old titles that new and older gamers can return to again and again.
Millions more expected to play games
As you can see, multiple trends are coming together to drive growth in the industry, which is expanding at a double-digit rate, estimated to reach $180 billion by 2021. More people playing games is helping drive that growth. In 2017, there were 2.21 billion gamers worldwide, according to Statista, and that number is expected to reach 2.73 billion by 2021.
Esports will also play a role in that growth. Last year, 335 million people watched others play video games competitively, according to industry researcher Newzoo. By 2021, it's estimated 557 million people will be watching esports, about half of those estimated to be occasional viewers.
With the number of gamers expected to keep growing, it doesn't appear the share prices of the companies discussed above have reached their ceiling just yet. Video game makers like Activision, hardware suppliers like NVIDIA, and peripheral makers like Logitech could have more room to run over the long term.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard owns shares of Activision Blizzard and Nvidia. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Nvidia, Take-Two Interactive, and Tencent Holdings. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.