Many industries experience major sales boosts during the holiday quarter, and the video game space is certainly one of them, as new consoles and games are popular gifts. But for a gift that keeps on giving, one might also consider video game industry stocks.
In 2020, consumers spent more than $155 billion on video games, and annual spending in the niche is projected to grow to north of $250 billion by 2025, providing the companies in it with huge and growing opportunities to pursue. Those tailwinds make the industry an excellent hunting ground for long-term additions to your portfolio.
Here are three gaming stocks investors should consider buying in December.
Image source: Getty Images.
1. Take-Two Interactive
For Take-Two Interactive (TTWO 0.18%), less is more. Unlike a lot of its peers, it spreads out the cadence of new releases for its franchises (outside of sports titles) and focuses instead on consistently updating its already-published games with fresh in-game downloads and purchases to drive revenue growth. Its most important franchises are Grand Theft Auto (GTA), Red Dead Redemption, and NBA 2K, with a few smaller franchises such as Sid Meier's Civilization mixed in.
GTA is by far its biggest franchise. Since GTA V's release back in 2013, the title has sold over 155 million units, making it the top-selling game of the last decade. It has been almost a decade since it has released a new premium GTA game, but Take-Two has kept its audience entertained through the GTA Online world, which comes free with a copy of GTA V. There have been more than 40 updates released for GTA Online since its launch, providing a steady supply of new gameplay and features for its community. Interestingly, Take-Two plans to launch a stand-alone version of GTA Online in March 2022. Severing the tie to GTA V could expand GTA Online's audience and may indicate that GTA VI is getting nearer to a launch date.
The online aspect is worth zooming in on because it has been a big growth driver for Take-Two's financials over the last five years. Since fiscal 2017, its recurrent consumer spending has grown at a compound annual rate of 37%, hitting $2.3 billion in fiscal 2021 (which ended in March). This has helped drive growth in operating cash flow, which hit $920 million last year, and brought the company's cash balance up to $2.7 billion. With a market cap of $18.4 billion, plans to release 62 games over the next three years, and consistent earnings coming in from GTA Online and other recurring-revenue sources, Take-Two Interactive's stock price is primed for years of gains.
2. Electronic Arts
Electronic Arts (EA -0.28%) dominates the sports video game market, where its top franchises include FIFA Soccer, Madden NFL, NHL, and F1. With regular annual releases and growing online services, these games produce predictable earnings streams. And as most leagues offer exclusive or limited rights to gaming companies to use players' likenesses or team-specific material, EA Sports has monopolies or near-monopolies in many of those franchises. EA Sports is reportedly planning to bring back its NCAA college football game in 2023, now that the issues around college athletes' name and likeness payouts have been resolved. This will return a popular sports franchise to EA's arsenal that it has been missing since 2014.
Outside of sports, EA's biggest growth drivers are the Apex Legends, Battlefield, and The Sims franchises. Apex Legends is the real gem. According to management, it's closing in on $1 billion in annual bookings (the sales equivalent for video games), which is impressive considering the game only launched in 2019. The Battlefield franchise has been a different story: Battlefield 2042 has been getting lackluster reviews ever since its launch a few weeks ago.
EA is guiding for $1.95 billion in operating cash flow this fiscal year, which will end in March 2022. With a market cap of $36 billion, that gives it a price-to-operating-cash-flow ratio of 18.5. For a high-quality business with predictable earnings power, that valuation feels like a steal, particularly for investors with long time horizons.
3. Nintendo
Let's wrap things up with Nintendo (NTDOY -0.57%), a unique company in the gaming industry. Unlike other game publishers, Nintendo also makes hardware, and most of its titles are available exclusively for its own devices. Its latest platform is the Nintendo Switch, which has sold 93 million units since it launched in 2017, making it the most popular gaming device worldwide over that time frame. Nintendo tried to extend the Switch's lifecycle with its recent release of an updated OLED model with a better and larger screen. So far, this strategy has worked out. The Switch remained at the top of the device unit sales charts in November -- a crucial piece of the holiday shopping season.
The big question for Nintendo is how durable the Switch's popularity will prove to be, as that will have a direct correlation to the company's game sales. That's because games are where Nintendo makes the majority of its profits. To help mitigate these concerns, the company has built an online service called Nintendo Switch Online that now has 32 million members. The service provides online multiplayer functions, free access to certain legacy games, and exclusive game previews. It is cheap, at only $20 a year, but hopefully, it can keep players more engaged with the Switch and Nintendo characters over the next five years.
Right now, Nintendo has an enterprise value of $42 billion. That metric is calculated by taking its $55 billion market cap and subtracting the $13 billion in cash it has on its balance sheet. Management is guiding for $4.56 billion in operating profit this fiscal year, which gives the stock a price-to-operating-profit ratio of 9.2. Considering the enduring franchises that Nintendo owns like Mario, Zelda, and Animal Crossing, this feels much too cheap. If you are confident that the Switch and Nintendo's game titles will enjoy durable popularity, now could be a great time to make a long-term investment in the stock.
