When investors think of gaming, names like Activision Blizzard or Electronic Arts often come to mind. Indeed, both companies own franchises that have captivated gamers for decades. Zion Market Research also forecasts a compound annual growth rate (CAGR) of 12% for the industry through 2028, indicating the sector should remain a compelling investment.
Nonetheless, the industry stretches well beyond game development, also encompassing support industries and conglomerates. To this end, investors wanting to drive returns with video game stocks should look closely at Advanced Micro Devices (AMD 2.33%) and Sea Limited (SE +0.99%).
Advanced Micro Devices is on the rise
Admittedly, AMD is far from "under the radar" in the semiconductor industry. Its CPUs and GPUs have earned increasing attention for technical and market share gains in the PC and data center industries. But that notoriety does not always extend to gaming. Even when investors think of gaming semiconductors, they typically look to Nvidia, as it started by developing chips for gaming purposes.
However, AMD has worked hard to claim its share of the gaming market, and it has developed the type of PC chips that top-level gamers prefer. Its products, such as the Radeon RX 6900 XT graphics card and the Ryzen 5000 G-series desktop processors can meet this demand. Consequently, AMD's chips go into the Omen 25L/30L from HP, the Alienware Aurora R14, and numerous other desktops and laptops.
Moreover, its chips power the latest versions of Sony's PlayStation and Microsoft's Xbox gaming consoles. And its 7nm chips also power handheld consoles such as the AYA Neo family of products. Such offerings make AMD's role in gaming increasingly critical.
Thanks to its products, gaming made up about 28% of the company's revenue in the first half of 2022. That means that gaming is AMD's second-largest segment measured by revenue. In total, gaming generated revenue of just over $3.5 billion, a 46% increase from the same period last year.
Despite its position, gaming may seem like a relative laggard for AMD, given the 70% year-over-year revenue growth for the overall company so far this year.
But from an industry perspective, gaming has performed well, considering that Ampere Analysis forecasts a 1% revenue decline in the global games market in 2022. That decline occurred after the industry experienced a 26% increase between 2019 and 2021, while much of the world locked down.
NASDAQ: AMD
Key Data Points
Like most tech stocks in recent months, AMD has fallen, and it has lost more than 50% of its value since November. Still, its price-to-earnings (P/E) ratio has dropped to 33, well under Nvidia's 45 earnings multiple.
That valuation likely prices AMD stock at a more attractive level for new buyers. As industry growth starts to resemble the long-term average CAGR of 12%, the gaming segment could become one of AMD's better performers.
There's reason to hope for Sea Limited
Both consumers and investors tend to associate Sea Limited with its Shopee e-commerce division, now its largest segment. They may also focus on a tiny but rapidly growing fintech segment.
However, many forget that the Singapore-based conglomerate started as a gaming company. Its gaming segment, known by the public as Garena, remains its second-largest segment and serves as a critical growth area for the company.
While it has developed numerous games, Free Fire has earned the most attention. According to App Annie, Free Fire drew the most mobile game downloads in 2019 and 2020. Garena also licenses and publishes games from partners in specific areas, fosters engagement among gaming communities, and organizes e-sports events.
In the first half of the year, those activities generated about $2 billion in revenue for its digital entertainment (gaming) segment. This is 12% higher than in the same period in 2021. It also constituted about 35% of the company's $5.8 billion revenue during that time.
Still, gaming was a relative disappointment for Sea Limited. The company's revenue increased by 44% over the same period. That decline occurred because of a 12% drop in digital entertainment revenue for the second quarter, a move likely driven by the end of lockdowns.
NYSE: SE
Key Data Points
Indeed, slowing revenue seems to have played a role in Sea's near-85% decline from its high. But that bad news does not mean investors should panic over Sea Limited stock.
For one, its price-to-sales (P/S) ratio has fallen below three, near record lows. Like AMD, Sea Limited should also benefit once gaming growth returns to its longer-term averages. With its existing growth from e-commerce and fintech, investors should profit from a significant amount of gaming-driven growth long-term.
