In 2021, it was estimated that people spent $178 billion on video games worldwide, making it one of the largest consumer categories. That number is expected to grow at a rapid pace to $269 billion in annual spending by 2025. This means that, over the next three to four years, there will be approximately $91 billion in new annual spending on video games that companies can go after. This huge secular tailwind makes the gaming industry an attractive hunting ground for finding potential new investments.
Three top gaming stocks that might make potential new investments in January are Electronic Arts (NASDAQ:EA), Nintendo (OTC:NTDOY), and Take-Two Interactive (NASDAQ:TTWO). Here’s why.
1. Electronic Arts
Electronic Arts is the premier publisher of sports video games in the world. It is best known for its FIFA Soccer and Madden NFL franchises, which are the biggest earnings drivers among its sports titles. On top of the sports franchises, EA has many other games, the most important being Apex Legends, the Sims, Battlefield, and some Star Wars games.
In 2021, EA made multiple acquisitions, mainly to bolster its mobile and racing game strategy. It acquired Codemasters, the top racing video game developer, for $1.2 billion. The purchase includes the rights to the Formula One video game franchise, which is one of the fastest-growing sports in the world. The company also bought Glu Mobile for $2.4 billion early in 2021, which brought in a bunch of existing mobile games and a large team of mobile game developers. EA management hopes these two acquisitions will help grow its mobile gaming bookings (the revenue equivalent for video games). Last quarter, the company showed good progress in this strategy, with mobile bookings growing 62% year over year to $279 million.
For fiscal year 2022, which ends in March, EA expects to generate $7.6 billion in net bookings and $1.95 billion in operating cash flow. With a market cap of $37.4 billion, EA trades at a forward price-to-operating cash-flow (P/OCF) ratio of 19. If you believe the company can continue to grow bookings and cash flow at a steady rate over the next decade, now could be an optimal time to take a position in this long-term compounder.
This second stock is probably the most recognizable video game company in the world: Nintendo. The company has stayed close to or at the top of the video game industry for decades, building huge franchises like Mario, Zelda, and Animal Crossing, just to name a few. It also owns a large chunk of the Pokemon Company, the top entertainment franchise in the world, giving it exclusive rights to publishing the Pokemon video games.
Along with game development, Nintendo sells its own hardware devices. Its most recent iteration is the Nintendo Switch, which has sold almost 93 million units since its launch in 2017. There are two big metrics for Nintendo investors to watch, both interrelated. First, the core of the business starts with hardware unit sales. For the full fiscal year ending in March, management expects to ship 24 million Switch units, which is held back some due to semiconductor supply constraints. Over the next few …….