Despite three major acquisition deals in the gaming space coming within weeks of each other, stocks of many smaller gaming players really haven't responded to the news, suggesting that the market doesn't believe the industry consolidation under way will be very widespread.
Take-Two Interactive announced it was buying Zynga for $12.7 billion. Microsoft said a week later it was acquiring Activision Blizzard for $68.7 billion. Then, Sony said it was picking up game developer Bungie for $3.6 billion.
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Yet, over the past month other gaming properties, including established ones, have fallen; The9 was down more than 20% while Electronic Arts was off 8% for the period. What this means is that if investors are going to look for investment opportunities in gaming, they're going to need to base their decisions on the merits of the company's businesses, not whether it's a candidate for being acquired.
The following trio of gaming stocks are among the best to watch in March.
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1. Skillz
Mobile esports platform Skillz (SKLZ 0.96%) has been one of the worst performers over just about any time frame you want to look at in the past year, losing 91% of its value in the last 12 months. But don't let that deter you.
First, that big drop in value is only because shares got caught up in the meme stock trading frenzy a year ago, which sent shares soaring to ridiculous heights. More recently, Skillz was battered because investing guru Cathie Wood exited her position in the gaming company, dumping millions of shares over a span of days.
No doubt, Skillz did a number of things wrong last year, especially spending too much money on low-return user engagement marketing. Skillz admitted to that on its recent fourth-quarter earnings conference call, and going forward will use at least part of that money to spend on developers for better, higher-quality games. It doesn't want to predict when it will have a game of the caliber of Call of Duty or Fortnite on its platform, but it does eventually see that happening.
Its partnership with the NFL should see at least one game, possibly more, launch in time for the 2022 season, while it plans to rein in some of its more grandiose ideas like entering the Indian gaming market.
Skillz believes the reduction in its engagement marketing and user-acquisition budgets will lead to revenue after engagement marketing growing better than 30% and expects to achieve adjusted EBITDA breakeven by the end of 2024. It's even looking at potential acquisitions of its own to elevate its game.
With its stock so depressed, it doesn't need much of a catalyst to boost shares higher.
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2. Roblox
Kid-oriented online gaming platform Roblox (RBLX -3.66%) isn't trailing very far behind Skillz in the cruddy performance standings this past year, but a lot of the decline it's experiencing is due more to the reopened economy than specific mistakes it made.
Roblox soared during the lockdown phase of the pandemic because it had a captive audience of children to entertain, but like many other parts of the leisure activities market, it sagged when out-of-home activities became more prevalent.
Yet the promise of Roblox is the advent of the metaverse, the virtual world where people can interact with one another, play games, or even conduct business. It's not a stretch to say Roblox is already there, because it creates a virtual space for interaction by tweens within a variety of games in the Roblox environment while others, like Meta Platforms, are just building it out.
The market has been reacting to the deceleration in user engagement resulting in widening losses, but Roblox is also expanding its offerings to older users. There may be a lower average bookings per daily active user (ABPDAU) because of the transition, but those players should be more consistent over time.
Roblox still carries a fairly high valuation at 14 times sales, so it might not be time to dive in just yet, but its shares bear watching as the metaverse takes off.
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3. Sea Limited
No. 3 on the hit parade is Sea Limited (SE 2.03%), which had the most downloaded battle royale online game in Free Fire in 2021, according to App Annie. However, it has seen its stock take a hit over concerns about widening losses, its dependence on just a single game, and potential fallout from a recent ban in the Indian market.
Sea Limited isn't only an online gaming site. It also operates a thriving e-commerce site called Shopee. It is the No. 1 retail app in Southeast Asia, according to the website Apptopia, and recently overtook MercadoLibre as the top e-commerce app in Latin America. It now boasts having Sea Limited's largest market by monthly active users.
However, Sea's losses have ballooned to $571 million due to its Shopee expansion efforts although in certain of those markets it is now profitable. And while not a one-trick pony on the gaming side, Free Fire is its primary revenue generator there. When India banned hundreds of games, including Free Fire, because of fears that personal user data was being stored in China and could possibly become compromised, it demonstrated the risk present.
Yet, Sea Limited isn't actually a Chinese company -- it's based in Singapore -- and it denies any data is stored in China. The Singaporean government is now involved, negotiating to have the ban lifted. However, Sea Limited's downturn started much earlier than these more recent developments. It was part of the market's transition from previous high-flying tech stocks, especially those that prospered during the depths of the pandemic, to more consumer goods-oriented names.
Sea Limited has lost almost three-quarters of its value from those recent highs, and especially if India reinstates Free Fire to other whitelisted apps, its stock should be on a watch list for any gaming-oriented investor.
