The video game industry is huge and growing quickly. Researchers estimate it will hit $200 billion in annual spending by 2023, growing at a 7.2% rate from 2019 to then. This provides a tremendous market opportunity for companies to go after. The studios and publishers with durable franchises and the resources to keep up with consumer expectations will likely be the ones to win over the long term.
Nintendo (OTC:NTDOY), Electronic Arts (NASDAQ:EA), and Activision Blizzard (NASDAQ:ATVI) are three top video game stocks that are poised to capture the growing demand worldwide, making the stocks buys in November. Here's why.
Nintendo is a Japanese video game publisher behind hit family franchises like Mario, Animal Crossing, and Zelda. Like the two other companies listed below, Nintendo develops and sells video games to consumers. But what makes Nintendo unique is that it also sells gaming hardware.
Its most current gaming device is the Nintendo Switch, a hybrid mobile/console system that has become extremely popular since its release in 2017. At the end of Nintendo's second quarter, the Switch had approximately 93 million units sold over its lifetime. Switch sales are very important to Nintendo because its games are almost always exclusively sold on its own hardware. Software sales (i.e., actual game sales, paid add-ons, and online subscriptions) make up the majority of Nintendo's profits, and if consumers can buy and play these games only through Nintendo's own hardware, it is imperative that the Switch (and/or whatever Nintendo's future gaming system may be) continues to sell well.
In October, Nintendo released an upgraded version of the Switch called the Nintendo Switch OLED, which has a bigger and brighter OLED screen to help improve game play. Coming into the holiday season and next year, this upgraded model will hopefully add players to the Nintendo gaming universe.
For fiscal year 2022, which ends in March of next year, Nintendo is guiding for 200 million software unit sales and an operating profit of $4.6 billion. With a market cap of $56.9 billion and $13 billion in cash on its balance sheet, that gives the stock a price-to-earnings (P/E) ratio of 11.9, which is cheap compared to the market average of 39. If you believe in the durability of Nintendo's famous gaming franchises, its stock looks like a low-risk/high-reward opportunity right now.
Electronic Arts is a video game publisher that is best known for its sports game franchises. These include FIFA Soccer, Madden NFL, and other franchises that release games every year to sports fans. FIFA Soccer is EA's largest game and continues to put up great numbers for the company. According to management, players of FIFA 22 are up 16% from launch compared to FIFA 21, which shows how EA can easily grow its player base alongside the growth of gaming worldwide.
Outside of sports games, EA is seeing strong growth from its free-to-play Apex Legends franchise. Management said on a recent conference call that the game is closing in on $1 billion in annual bookings, and this is before a mobile game gets released next year. Apex Legends' rapid growth is a key reason EA raised its full-year guidance for bookings and operating cash flow to $7.6 billion and $1.95 billion, respectively, for the fiscal year ending in March 2022.
EA is very shareholder friendly, with a new dividend that is currently yielding 0.5% and a strong share-repurchase program. Over the last 12 months, the company has repurchased 9.5 million shares with a total value of $1.3 billion.
With a market cap of $40 billion, EA trades at a forward price-to-operating-cash-flow (P/OCF) of 20.5. Seeing as EA's cash flow generally converts to earnings over the long-term, this is a discount to the S&P 500's average price-to-earnings ratio (P/E) of 30 right now. If you believe in the continued growth of EA's diversified set of gaming franchises, now could be as good a time as ever to buy into this long-term compounder.
Activision Blizzard develops and publishes some of the top gaming franchises in the world, like Call of Duty, World of Warcraft, and Candy Crush.
Currently, the company is going through struggles at its Blizzard studio, which has had some terrible sexual assault allegations that have caused many employees to leave. This is definitely something to watch out for as shareholders; the company needs to maintain employees to help develop its games. However, this scandal hasn't caused people to stop buying games yet.
In the third quarter, net bookings came in above the company's internal expectations, hitting $1.88 billion. Two mobile titles, Call of Duty: Mobile and Candy Crush, are driving a lot of Activision's growth right now. In-game net bookings for Candy Crush grew 20% year over year in the third quarter, and Call of Duty: Mobile bookings grew 40% year over year in the period.
On top of these games, Activision has another Call of Duty mobile game coming out (name not yet known) and a mobile game for the Diablo franchise called Diablo: Immortal due in 2022. This new Diablo game should help drive growth for the new console/PC game Diablo: IV slated to come out in 2023 or 2024.
The stock has a market cap of $53 billion, but if you ex-out its cash and debt, its enterprise value is only $46.5 billion. This gives the stock a trailing P/OCF of 16 -- even cheaper than EA's -- based on the $2.89 billion in operating cash flow the business has generated in the last 12 months. If you believe that Activision Blizzard can continue growing over the next few years and beyond, now looks like a great time to buy this top video game stock.