The video game industry has grown tremendously over the last 50 years. The growing adoption of mobile gaming and development of virtual reality should drive huge growth for the industry over the next decade.
IDG Consulting expects the video game industry to reach $282 billion by 2026, up from $221 billion in 2021. It's a major opportunity for game makers Activision Blizzard (ATVI) and Nintendo (NTDOY -0.41%), which own leading franchises with dedicated fanbases.
With Microsoft in the process of acquiring Activision Blizzard, Activision might have limited return potential because of the pending deal, but I would still prefer it over Nintendo. Here's why.
Consistency wins the game
Nintendo has been around a long time, but its main obstacle to delivering consistent growth is that half of its business is dependent on hardware sales. This means Nintendo must sell more units of pricey consoles every year to grow. That's difficult to do in a console market that doesn't grow much with each new console generation. Activision is focused on making games, which lends to more consistent financial performance every year.
Activision ended 2022 with 389 million monthly active users across all its games, including 233 million from King Entertainment's mobile titles, such as Candy Crush and many others. This makes it much easier for Activision to generate year-round revenue from new game sales and extra content sold to players while in the game. Activision's in-game bookings (a non-GAAP measure of revenue) grew 6% in 2022 and made up nearly two-thirds of the business.
Since 2009, Activision's annual revenue has increased at a smoother rate than Nintendo's. The Mario Bros. creator typically sees its biggest growth spurts around new console launches, such as the Wii in 2006 and most recently the Nintendo Switch in 2017. But after the initial adoption curve is over, Nintendo typically sees annual sales fade until the next console release, and there are often several years between each new console generation.
Data by YCharts
This is why Nintendo is primarily focused on expanding its audience for its software titles. In recent years, it has started opening theme parks and investing in making films adapted from its top gaming franchises. But it's unclear how much effect these initiatives will have on growing sales of games, which Nintendo desperately needs to do if it is going to keep up with Activision over the long term.
Nintendo's sales declined by 2% through the first nine months of its fiscal 2023, ended in December. The weak performance was credited to component shortages for hardware and the weakening consumer spending environment.
While other video game companies also reported weak financial results, Activision finished the year strong after the release of the new Call of Duty title in the fourth quarter. Activision's bookings surged 43% year over year in Q4, driven by Call of Duty across console, PC, and mobile. The October 2022 launch of Call of Duty: Modern Warfare 2 was a record opening quarter in terms of sell-through at retail in the game's history.
Activision has more coming. Diablo 4's release in June should be a blockbuster. The company is also planning more content releases for Overwatch, which has been stimulated again by the recent release of Overwatch 2.
The Microsoft factor
Activision looks like a win-win situation for investors. It has proven it can still sell a lot of copies of Call of Duty even in a weakened consumer spending environment, and the deal with Microsoft provides another catalyst.
Last year, Microsoft offered to acquire Activision in an all-cash deal valued at $95 per share. Activision shareholders already voted to give their approval, but the deal still has to pass the regulatory process.
If Microsoft receives approval to acquire the Overwatch maker, Activision shareholders will lock in a 23% return from the current share price of $77. All you would have to do is hold your shares until the deal is completed.
If the deal doesn't get approval, Activision stock could still move higher this year based on the expected growth from Call of Duty and upcoming releases. Activision's guidance calls for "strong financial performance" in 2023, with bookings growing in the high single-digit range.
Activision has more to offer
Nintendo lacks the catalysts to grow sales and profits in the near term, which leaves the stock with limited upside potential. If it was launching a new console this year, it might be a different story, but management seems content to ride with the Switch for longer than previous console cycles.
Activision's lack of dependence on hardware sales, massive installed base of players, and near-term catalysts make it the better stock to buy right now.
