You may be unaware unless you follow it closely, but video games are one of the largest industries in the world. There are an estimated 2.7 billion gamers around the globe, and spending is projected to hit around $200 billion a year by 2023 versus around $180 billion last year. Such a large tailwind makes the industry perfect for the basket approach of buying multiple stocks competing within the same market.
Electronic Arts is a video game publisher with a big focus on sports franchises. Its largest franchise is FIFA, followed by Madden NFL and other smaller titles. Thirty-one million players have joined FIFA 21 (the latest game release) since its launch, making it one of the biggest games in the world. EA also has long-running franchises like The Sims and Battlefield. The Battlefield franchise is coming out with a new title this year called Battlefield: 2042. If the game does well, it could help EA meaningfully grow revenue during the holiday quarter.
EA's most promising franchise is Apex Legends, a free-to-play game similar to Fortnite. Management says that Apex Legends continues to top its daily player record, even while heading into the summer months, which is a great sign for the growth of the franchise. EA is guiding for $7.4 billion in net bookings (the revenue equivalent for video game companies) and $1.85 billion in operating cash flow for the fiscal year ending next March.
Cash flow is going to be down from last fiscal year, but that is mainly because EA has made four acquisitions in 2021: Codemasters, Glu Mobile, Playdemic, and Metalhead Software. These are the first acquisitions since 2018 for the company and will have extra one-time expenses associated with them this fiscal year. However, over the next five years, they can help EA grow and diversify its game catalog.
EA has a market cap of $41 billion, giving the stock a price-to-operating-cash-flow (P/OCF) of 22. If you believe EA can meaningfully grow cash flow from next fiscal year onward, the stock looks like a great buy right now.
Like EA, Take-Two Interactive is a video game publisher. It has three main franchises that drive the business: Grand Theft Auto, NBA 2K, and Red Dead Redemption. The most important is Grand Theft Auto. The franchise had its last major release in 2013 with GTA V, but the game has had tremendous staying power through GTA Online, which is also launching as a stand-alone game this fall.
GTA V was the best-selling game of the past decade, and while there are high expectations for whenever GTA VI comes out, the brand is as strong as ever among gamers at the moment.
This momentum, along with a successful Red Dead Redemption II launch a few years ago and the dependability of NBA 2K, has helped Take-Two's net bookings grow at 17% a year from fiscal year 2017 through fiscal year 2021. Last year (fiscal year 2021), Take-Two generated $920 million in operating cash flow, and now has $2.7 billion in cash on its balance sheet.
It is hard to put an earnings multiple on the stock, since year-to-year cash flow and bookings may end up a bit lumpy, but investors should be confident Take-Two can continue growing bookings and cash flow over the long term.
The company has 62 games in its pipeline coming out over the next few years. Most of these games will be meaningless to the business, but that allows for a lot of shots on goal with the potential that one or two can become big franchise-builders over the next decade.
Right now, Take-Two stock has a market cap of $17.5 billion. Management is only guiding for $380 million in operating cash flow this year due to the lumpiness of the video game business. But if you look at the long term, Take-Two is poised to generate over $1 billion in cash flow in most years going forward. Compare that to a market cap of $17.5 billion and the tailwind of the video game industry as a whole, and Take-Two stock looks very cheap right now.
Wrapping up this basket is Activision Blizzard, the biggest company among American video game publishers. The company is known for Call of Duty, which brings in the majority of its revenue. The franchise has three ways to play nowadays: The traditional premium version, a free-to-play game called Warzone, and Call of Duty: Mobile.
On top of Call of Duty, the company makes a bunch of fantasy-based games through its Blizzard studio, like Starcraft, Diablo, and Overwatch. The studio is coming out with three new Diablo titles over the next few years, and has a new Overwatch game coming soon. These games are not as important as the Call of Duty franchise, but can help the company grow over the next decade, especially if Activision Blizzard launches more free-to-play and recurring revenue items.
Lastly, Activision Blizzard owns the King studio, which makes one of the most popular mobile games ever: Candy Crush. The studio has a fast-growing advertising network for mobile games, with ad revenue growing over 100% year over year last quarter.
Activision Blizzard is guiding for $8.65 billion in net bookings this year. Last year, the company generated $2.25 billion in operating cash flow (it hasn't guided for cash flow this year). With a market cap of $60 billion, if Activision Blizzard can grow cash flow over the next few years, its valuation could get cheap really fast. This makes it a perfect stock to round out this video game basket.