The video game industry is surging with sales estimated to have increased by 20% in 2020. There are plenty of trends to keep growth going, including interest in new consoles, live game streaming, and upcoming releases from top game companies.
Game sales are expected to reach $218 billion by 2023, according to Newzoo. Here are my top stock picks to ride this tailwind.
Activision Blizzard: New games could drive big sales
After a momentous year of player engagement across its top franchises, Activision Blizzard (NASDAQ:ATVI) is on pace to hit a record $8.1 billion in total bookings for 2020 with much improved performance from its top three franchises: Call of Duty, World of Warcraft, and Candy Crush on mobile.
Management is looking to keep the business growing in 2021 with greater execution across these games. What's more, Blizzard has three monster new releases waiting in the wings in Overwatch 2, Diablo 4, and the mobile version, Diablo: Immortal.
The company has not announced specific release dates for these new titles, but there is a sizable built-in audience for each game. The first Overwatch release amassed over 50 million players, while Diablo has a large following of dedicated fans that allowed the previous release in 2012 to break PC sales records at the time.
Other top game makers, including Electronic Arts and Take-Two Interactive, are also looking strong in the near term. But Activision doesn't release a new game very often, and when it does, it makes a huge splash. Now is the time to begin building a position in the stock, before these games launch.
Corsair Gaming: New technology driving sales of PC upgrades
Corsair Gaming (NASDAQ:CRSR) is one of the leading suppliers of PC components, DRAM memory modules, keyboards, and other gaming essentials. It's also expanding its product offerings with streaming gear, such as lighting and green screens, that help people deliver a professional-looking broadcast on streaming platforms.
The company just completed its initial public offering in Sept. 2020, and the stock price has already soared about 170% from its first-day close. But more gains are likely as investors appear to be undervaluing the company's growth prospects.
Management's latest guidance calls for 2020 revenue to increase by 50% to 52% with adjusted operating income surging 183% at the low end of guidance. This growth stems from high demand across all product categories. Plus, the new graphics cards from NVIDIA and Advanced Micro Devices should only stoke demand from those looking to upgrade their gaming PCs.
The stock trades at an enterprise value-to-EBITDA ratio of 19 based on management's full-year 2020 guidance. This is a reasonable valuation for a company growing at these levels, especially with management targeting margin improvement going forward to grow profits further.
Glu Mobile: Best bang for your buck
Glu Mobile (NASDAQ:GLUU) is finishing up a great year with bookings on pace to grow approximately 32% in 2020. The company's top three games -- Design Home, Covet Fashion, and Tap Sports Baseball -- reported double-digit growth in the last quarter, but it's just getting started.
Like other video game companies during the pandemic, Glu Mobile has benefited from an increase in player engagement, but management is also focused on improving productivity and generating better returns from user acquisition. Management attributed these initiatives to the record adjusted EBITDA generated in the third quarter, leading to free cash flow of $46 million over the past year.
Glu Mobile might be the best value of any stock featured here. Shares of Glu Mobile trade at 34 times trailing 12-month free cash flow. That valuation is attractive, considering the prospects for robust growth in profits as Glu Mobile improves margins and releases new games.
The mobile game market also happens to the fastest-growing category for game sales, estimated at $86 billion, according to Newzoo. Glu Mobile is pouncing on that opportunity with a deep pipeline of titles under its Glu Sports brand, including Deer Hunter World and Tap Sports Fishing, in addition to Table & Taste from its Crowdstar studio.
The company also has a series of hyper-casual, ad-based games in the works that will be designed to grow Glu's user base and steer players toward its biggest cash generators, such as Design Home and Covet Fashion.
With a robust lineup of releases planned and a reasonably priced stock to boot, Glu Mobile is poised to outperform the broader market in 2021 and beyond.