The pandemic led to stellar results in the stock market for many gaming companies. With more and more players headed outside to "touch grass" and fewer stuck indoors with their computers, those hot and heady days for gaming investors might seem like history. Still, major players in this market don't stay down for long. It may seem as if the bears have come out to play, but two big names might well use this month to grow their presence in the gaming world.
Roblox (RBLX -1.64%) owes much of its success to the proliferation of creators with ample time on their hands, both before and after the pandemic lockdowns. It's still a new kid in a space defined by no fewer than two generations of gamers, but Roblox continues to show signs that it will be able to grow in the gaming industry.
Microsoft (MSFT 0.06%), however, remains an old hand as far as the decades-old video game industry goes. The tech giant continues to snap up smaller, highly successful companies and position itself as a leader ready to challenge all competition.
Roblox readies for a rebound
Accessibility, community, and creativity formed the three pillars of success for Roblox, from its early days through its March 10 initial public offering (IPO) last year. A relatively low barrier to entry -- only midrange gaming hardware and an internet connection -- helps Roblox remain accessible to all. Its community draws from gamers of all ages around the world.
Gamers create much of the content for Roblox and purchase and spend its virtual currency, bolstering its overall revenue. Roblox then distributes revenue to app stores selling "Robux" (Roblox's in-game currency) and content creators involved in each Roblox world development, and the company keeps a lion's share of around 48% of each purchase. Consumers, creators, and actual employees all contribute to each virtual world.
Because of these virtual worlds, Roblox also offers multiple gateways to the metaverse, which has quickly become a hot venue for tech and gaming investments. In July, investors should keep an eye out for signs that bear conditions and a potential cooling of the job market could lead to more stay-at-home gamers. These may indicate conditions ripe for a Roblox resurgence.
The gaming company still needs to mature
Roblox has some maturing to do if it's to grow into its current valuation. At one time, over half of the kids in America played in its virtual spaces. Following its IPO, Roblox attained stock prices of $141.60 before tumbling to lows in the $20 range as lockdowns ended. With recent market caps hovering around $22.5 billion versus $2 billion in revenues, the fledgling company must show it's worthy of being sold for more than 10x what it currently makes.
There's also no sure thing in metaverse investments. With crypto crashing and NFTs beginning to fizzle, a virtual future is a hard sell. That hasn't stopped tech giants, from Alphabet to Meta, from investing further in virtual spaces beyond the web. Roblox's future could be bright -- or serve as a launchpad to the metaverse for bigger, hungrier beasts like Sony, Disney, or even Microsoft's gaming divisions.
Microsoft's acquisitions strongly bolstered its gaming division
Microsoft loves a good acquisition, and with a market cap of around $2 trillion, it has the funds to make them happen. February's announcement that the company sought to pick up Activision Blizzard (ATVI) -- potentially completing the biggest gaming acquisition in history -- sent shockwaves throughout the gaming market (even as it came on the heels of Sony's pickup of Bungie, the masters behind Microsoft's own Halo franchise).
The company's gaming division continues to make major news for the brand, posting $3.74 billion in revenue for the March quarter. That's a sizable piece of its total $49.4 billion in revenue for the same period, helping it beat many estimates on its overall earnings per share. The same tailwinds favoring Roblox this July could send the Microsoft gaming ship sailing, allowing it to deliver an even greater chunk of the company's earnings in the coming months.
Antitrust litigation remains a hurdle
Acquisitions come with intense scrutiny not just from investment regulators in the United States but also overseas. The European Union and the United Kingdom both monitor Microsoft carefully to limit or prevent anticompetitive behavior due to the tech giant's sheer size and scope. Since it's a veteran of these regulatory games, Microsoft offered a bevy of commitments and policies to help assuage fears and potential regulatory crackdowns.
These could derail the merger and send Microsoft back to the drawing board regarding getting its hand on Call of Duty, Overwatch, and other Activision Blizzard assets. The Communication Workers of America's recent endorsement of the deal carries more weight at home for the company, but it could also bolster their chances of regulatory approval on distant shores.
Keep an eye peeled for opportunities and signs of growth
July often brings sweltering temperatures and new highs on the thermometer, but it could also deliver the boost these two dramatically different gaming companies need to strengthen their overall positions in the market. Kids who started playing Roblox in 2006 are now in their 20s, and their presence will soon be felt economically.
Microsoft fans may well be a bit older, but this summer could also bring the regulatory approval needed to complete the largest gaming acquisition of all time and secure Microsoft a seat as the third-largest gaming company in the world (after Tencent and Sony). If you're feeling brave, this might be the time to test the waters with these two gaming stocks. At the very least, it merits getting a good look from the shore before jumping in on a potentially recession-resistant gaming market.