The video game industry has experienced ups and downs over the years, but it has come a long way since the arcade heyday in the 1970s. New platforms and technologies brought new people into the hobby and pushed the value of the market higher. The games market is expected to reach $385 billion this year, according to Statista.
This is a big market for content platforms like Roblox (RBLX -0.74%) and leading gaming peripheral brands like Corsair Gaming (CRSR -0.27%). After a sluggish year of growth, these stocks are trading up 35% or more this year, as investors see a recovery on the horizon.
If you're interested in adding a gaming stock to your portfolio, here's why these two stocks would be great choices in May.
1. Roblox
Roblox saw its platform continue to welcome new users over the last year, but the company's financial results were somewhat lacking. The stock collapsed from a combination of slowing revenue growth and an expensive valuation. But the economic headwinds that caused revenue to weaken are easing, which sent the stock up 35% year to date.
Daily active users (DAUs) reached 66 million in the first quarter, up 22% year over year. That is an acceleration over the previous quarter's 19% growth rate. Roblox also continues to see older users join the platform, with age 13 and up users growing 31% year over year. This is a positive trend that should lead to higher spending per user over the long term.
On that note, the recent decline in average bookings per daily active user showed consistent improvement in recent quarters.
Image source: Roblox. Note: Bookings is a non-GAAP financial measure that Roblox management said it believes is useful in evaluating performance and is presented for supplemental information purposes only and should not be considered in isolation from, or as a substitute for, financial information presented in accordance with GAAP.
Roblox also saw accelerated bookings (a non-GAAP measure of revenue) and free cash flow. Free cash flow turned positive in the quarter -- the first time it has been positive since the beginning of 2022. This could be a game changer for the company's growth strategy.
Roblox is building a new data center in Ashburn, Virginia. Continued growth in the user base is expected to open up more improvement on the bottom line once the upfront costs are out of the way.
Management sees growth in bookings exceeding its infrastructure costs in the second half of the year. This should lead to greater free cash flow generation that management can use to fund new technologies that drive even more efficiency in the business.
The use of artificial intelligence (AI)-powered creation tools could be a lucrative opportunity. Roblox launched two AI-generative accelerators that help content creators develop new experiences on the platform much faster than before. Frequent content releases on the platform could have significant implications for user growth and engagement over the next several years.
It's for these reasons that investors should consider buying the stock now. Roblox's business is swinging back to positive free cash flow on top of an accelerating top line, which could fuel a positive cycle of investment and growth for many years.
2. Corsair Gaming
Corsair Gaming was in the same boat as Roblox and the rest of the gaming industry last year. This leading brand of gaming peripherals and other accessories saw its share price plunge on weak revenue in 2022. However, the business is starting to turn around, which sent the stock up 39% year to date.
There was a tremendous surge in new players buying gaming keyboards, mice, headsets, and pre-built gaming PCs during the worst of the pandemic. That created a lot of volatility in Corsair's business once the economy reopened. But these headwinds appear to be fading.
Corsair is showing signs of stabilizing after reporting a revenue decline of 7% year over year in the first quarter. This is much less than last year's revenue decrease.
The important takeaway is that gamers are starting to return to the market to upgrade their gaming PCs. Sales of components and systems make up the majority of Corsair's business, and this segment posted a 7.5% year-over-year increase in revenue in Q1.
The gaming peripherals market remains soft, which led to Corsair's overall revenue decline, but gaming is here to stay. There were an estimated 1.75 billion PC gamers in 2020, and that figure is expected to increase gradually over the next few years. As a leading brand, that spells growing demand for Corsair's products.
Gaming peripherals are to gamers what a Nike sneaker is to an athlete. Competitive gaming, or esports, requires the right hardware and accessories for players to perform at their best. This is ultimately what is driving Corsair Gaming's business.
With the business starting to return to the performance investors expected at its initial public offering in 2020, now's a good time to consider buying this under-the-radar gaming stock.
