Video games make up one of the largest industries in the world. In fact, the category is larger than the combined value of the music and movie industries, worth around $200 billion in 2021. With new consoles, virtual reality (VR), and other gaming methods coming to market this decade, third parties estimate the industry will continue growing at a 10%-plus rate through 2030. This is a massive tailwind and should provide plenty of new revenue opportunities for high-quality video game companies to go after.
Here are two video game stocks to buy now and hold for at least a decade.
1. Electronic Arts
Electronic Arts (EA 0.51%) is one of the largest game publishers in the world. You can separate its gaming division into two categories: sports and non-sports franchises.
EA is the leader in sports video games and has been for the past few decades. Its most popular title is FIFA (a soccer game), but it also has Madden NFL, hockey, golf, Formula One, and an upcoming college football game. With exclusive licenses with leagues and players from these different sports, EA has a virtual monopoly on these sports simulation franchises, making revenue extremely reliable when new titles get released each year.
For nonsports, EA owns franchises like the Sims, Battlefield, Apex Legends, and tons of other smaller titles. It also has a strong relationship with LucasFilm to produce Star Wars games.
Financially, the most important games for EA are FIFA and Apex Legends. In its fiscal 2022, which ended in March, both franchises looked to be in a healthy state. Apex Legends grew bookings (the revenue equivalent for video games) 40% year over year, and FIFA had over 150 million active accounts, with FIFA 22 the best-selling game in the franchise's history. Consolidated bookings grew 21% in the year to $7.5 billion, and the company generated $1.9 billion in operating cash flow. This fiscal year, EA expects to generate $7.9 billion to $8.1 billion in net bookings.
With a lock on sports video games and a plethora of other intellectual property (IP), EA should have an easy time compounding its revenue and earnings for the next 10 years. At a trailing price-to-operating cash flow (P/OCF) of 19, now looks to be a great time to pick up some shares.
NASDAQ: EA
Key Data Points
2. Take-Two Interactive
Another larger gaming publisher is Take-Two Interactive (TTWO 1.38%). Like EA, Take-Two owns and operates some of the highest-quality IP in the gaming space. These include NBA 2K, Red Dead Redemption, Grand Theft Auto, and other franchises.
In fiscal 2022, Take-Two generated around $3.4 billion in net bookings. This was down slightly from 2021, but that is because Take-Two has lumpier product releases that can impact sales. It has been multiple years since a new Read Dead Redemption or Grand Theft Auto title has been released, so it is not surprising last year was a down year financially.
However, Take-Two's Rockstar studio announced it was officially working on the next title for the Grand Theft Auto series, likely meaning it is coming out within a year or two. With the last game in the series becoming the best-selling video game ever, investors should be excited about what this could mean for Take-Two's financials the next few years.
Take-Two is in an interesting spot at the moment. It just acquired Zynga, one of the top mobile game publishers, in a huge merger worth around $12.7 billion. The deal has already closed and will immediately give Take-Two exposure to the fast-growing mobile games market. Plus, with Zynga's expertise in mobile development and monetization, there are some lucrative opportunities to expand Take-Two's top three franchises -- NBA 2K, Red Dead Redemption, and Grand Theft Auto -- into the mobile space.
NASDAQ: TTWO
Key Data Points
Right now, Take-Two trades post-merger at a market cap of $20.7 billion. The combined companies generate around $6 billion in net bookings and expect bookings to compound at 14% a year through fiscal year 2024. If it can start generating cash flow margins close to what EA has and get cash flow to $2 billion a year, shareholders will earn good returns by holding shares of Take-Two this decade.
