Warren Buffett's Berkshire Hathaway initially bought shares of leading game maker Activision Blizzard (ATVI) in the fourth quarter of 2021. The Oracle of Omaha went on to accumulate a $5 billion stake following Microsoft's $95 per-share offer for the company in January. Berkshire's interest in one of the leading game makers in the world is a bullish indicator for the future of the video game industry.
Recent sales figures for top releases from Activision Blizzard, Electronic Arts (EA 0.88%), and Take-Two Interactive (TTWO -0.42%) could be sending a strong buy signal for investors. All three stocks delivered market-beating returns over the last decade but have fallen with the broader market. Here's why this is a great buying opportunity.
Strong demand for the latest releases
The narrative on Wall Street is that interest in video games is waning. Analysts have pointed to weak results at Roblox and slowing chip sales at Nvidia, which supplies graphics cards for PC gaming enthusiasts. Market researcher Newzoo expects industry sales to grow only 2% this year. However, it's still a massive industry approaching $200 billion, and recent interest in the biggest releases indicates that the industry could reaccelerate next year.
Activision Blizzard launched the highly anticipated sequel to its team-based shooter Overwatch on Oct. 4, and over 35 million players have already downloaded the free-to-play title. In its third-quarter earnings report, Activision said Overwatch 2 has driven all-time highs in player engagement.
Activision released another big one on Oct. 28 with Call of Duty: Modern Warfare 2, which also set a record. The company said the new Call of Duty title sold through $1 billion within the first 10 days -- the fastest rate in the game's history.
The demand is healthy across the market. Electronic Arts reported the biggest launch for the EA Sports FIFA franchise in history. FIFA 23 has already been played by over 10 million players in the first week of release.
As for Take-Two, Grand Theft Auto V continues to exceed management's expectations with life-to-date unit sales crossing 170 million since launching in 2013.
Take-Two also reported strong interest in the September release of NBA 2K23, which has already sold over 5 million units. That comes on top of a higher selling price than last year's NBA 2K22. In a high inflationary environment, that is a very healthy indicator of demand in the gaming market.
Image source: Getty Images.
Video game stocks are undervalued
Clearly, demand for big-budget titles on console and PC is high right now. Activision Blizzard expects bookings (a non-GAAP measure of revenue) and operating income to grow at least 20% year over year in Q4. If Microsoft receives approval from regulators, it will be gaining a video game company with a lot of momentum following the release of Overwatch 2.
Top video game companies offer good growth prospects, high free-cash-flow generative business models, and trade at reasonable valuations compared to the S&P 500 average price-to-earnings (P/E) multiple of 19.5.
Activision trades at a P/E of 18.9 based on next year's earnings estimate. The stock trades at a significant discount to Microsoft's buyout offer, which values Activision at 25 times 2023 earnings estimates. Electronic Arts and Take-Two have similar growth opportunities as Activision and trade around the same valuation.
EA now has over 600 million players across its games. With the momentum in its best-selling soccer franchise and new gaming experiences coming to mobile devices, management is targeting the 3.5 billion soccer fans worldwide. EA stock trades at a forward P/E of 18.7.
Take-Two stock fell hard following its latest earnings report due to weakness in mobile and a delay in upcoming releases. But it's a speed bump as Take-Two's acquisition of Zynga sets it up for lots of growth in the $100 billion mobile game market. NBA 2K23 and Grand Theft Auto are two of the best-selling titles in the industry that generate recurring revenue from virtual currency. Take-Two stock now sells at a forward P/E of 24.7.
Recent performance of top games suggests video game sales are remaining resilient in a choppy economy. Games offer immersive entertainment and high value compared to alternatives. Without trying to cherry-pick which stock will outperform the rest, I would consider investing an equal amount in all three stocks.
