Playing for Profits With Video Gaming Stocks

One sector that has been a beneficiary of the stay-at-home theme since the outbreak of Covid-19 has been video gaming. Several leading investment experts and contributors to MoneyShow.com, highlight their top ideas in the video and online gaming space. Jon Markman, Pivotal Point Shares of video game stocks are back to new highs even as the broader market sinks. Investors have fallen back in love with the long-term investment story. Activision Blizzard recently reported blowout financial results led by big demand for its newest Call of Duty game. The action speaks to the dynamism of video game business. Longer-term, there is no reason to believe the video game story is over. Entertainment, especially among millennials, is moving toward interactive titles. Engagement is why video game culture is far bigger than most non-gamers understand. Players are vested in the storylines and outcomes. Sales during the first quarter reached $1.5 billion, up 21% year over year. CEO Bobby Kotick says some of this was due to Covid-19. He explained that people staying indoors had a big impact on engagement and they spent more on in-app purchases. Kotick was also quick to dismiss the decline in digital ad sales. He expects that spending will return, helped by Activision's growing eSports businesses. With live sports in hiatus for the foreseeable future, there is a legitimate opportunity to capture more eyeballs and digital spend with eSports. Kotick says he expects more sponsorships and higher prices for broadcast rights. Big players like Activision have the right product mix of paid and free games. Franchises that were on the wane have been revived with new storylines and more realistic imagery. This is a great long-term play and investors should use pullbacks as opportunities. Taesik Yoon, Forbes Investor SciPlay recently reported quarterly results. First-quarter revenue of $118.3 million fell $1.7 million short of consensus, representing a solid 4.8% sequential improvement from the fourth quarter, with revenue increasing each month driven by a quarterly record 6.3% payer conversion rate and a 9.2% rise in average monthly revenue per payer to $83.58. The company attributed this to its focus on delivering significant and compelling enhancements across its portfolio to improve player engagement and monetization. Moreover, while adjusted earnings of $0.19 per share also came in below the $0.23 analysts were anticipating, this still marked a 58.3% jump from first-quarter 2019. Boosted by this strong absolute operating performance, SCPL was also able to generate $23.5 million in operating cash flow. This represents a whopping 177% increase from last year's $8.5 million and left the company with a very comfortable cash cushion of $132.6 million against its already debt-free balance sheet. But with SCPL actually benefiting from the coronavirus pandemic, its strong liquidity position is simply gravy. Indeed, as we anticipated, demand for the company's games actually picked up late in the quarter as a result of the stay-at-home measures across much of the U.S. and this momentum continued into April, in which it generated record monthly revenue that was 20% higher compared to an already very strong March. With SciPLay's games well positioned to continue providing a digital escape for its players as the impact of Covid-19 continues to evolve and while we await additional business re-openings and the relaxation of social distancing orders, we see additional upside ahead for its stock, which -- despite its strong gain month-to-date -- continues to trade at a sharp discount to those of its electronic gaming peers. Glenn Rogers, Internet Wealth Builder Electronic Arts is one of the bigger publishers of video games. They include such products as FIFA (which of course focuses on soccer), Madden (a series of NFL-based games), and Battlefield. We recommended this company in October 2018 when it was trading at $106.10. It briefly spiked after we recommended it and then essentially traded sideways for the past year. It's having its moment in the sun now, however, with young gamers stuck at home, and the stock is starting to take off. In my view, it's destined to go higher from here. Electronic Arts reported fourth-quarter and 2020 year-end results and beat expectations. For the full year, revenue came in at $5.5 billion, up almost 12% from fiscal 2019. Net income was just over $3 billion ($10.30 per share) compared to $1 billion ($3.33 per share) last year. Electronic Arts' forecasts for fiscal 2021 look conservative. It projects revenues will be about the same as in fiscal 2020 - with earnings per share of $3.35. The company may do better. Microsoft is launching its new Xbox and Sony has a new platform coming out as well, which generally inspires new games and new users. The company has a number of sports related games that are in high demand now that the real thing is unavailable. It also just announced a partnership with Google to put five games on Google's Staida gaming platform. Eddy Elfenbein, Growth Stock Advisor Online entertainment was growing at a fast clip even before the Covid-19 crisis forced everyone indoors but is now taking off with companies reporting blowout earnings and massive share price gains for 2020 despite the March selloff. Now might be the time to dip your toes in this space as growth is only accelerating. One beneficiary has been Nintendo (NTDOY). If the last time you picked up a game controller was to play Mario Bros. on a Nintendo 64, you're missing out. The company has designed a sleek new mobile gaming device -- the Switch -- that is the gaming platform for a new generation of young gamers. Gaming companies today have ubiquitous marketing as they tie their games in with famous entertainers, movies, and social media. Nintendo is promoting its Pokémon brand with Detective Pikachu, a recently released movie starring Ryan Reynolds. While Nintendo reported some supply chain issues due to the coronavirus, it appears to be back on track assuming no worsening of the crisis in China, where many of its Switch components are produced. Nintendo did lower guidance for 2020 slightly, but the company has a history of under-promising and over-delivering. Peter Mantas, Logos LP Blog We rarely buy IPOs -- but any IPO listing during a depression/recession should be considered -- as the decision to list suggests significant buyer demand and thus potentially attractive business models. Two such opportunities of interest have presented themselves of late. Gan PLC provides a SaaS solution to U.S. casinos and online sports betting operations, which is currently a greenfield space as the U.S. is only starting to open up to online sports betting and iGaming nationally. Their end-to-end solution is focused on everything from account management to payment processing to setting up betting lines. The company is growing at a pretty rapid clip (+145% YoY revenue growth in 2019) and has a high-single-digit take rate on every dollar won by casino operators. Gross margins are around 64% and we expect this to shoot up as revenue starts to materially increase into 2025. It is really one of the only providers in software and development services, and also has a U.S. patent for their U.S. casino management platform. One of the largest U.S. operators in online betting and owner of SBTech -- which is a B2B online betting platform -- Draftkings is still in early days with a huge total addressable market (over $20 billion for online sports book in the U.S. alone). Disney recently bought a 6% stake in the company (presumably to position iGaming with ESPN in some capacity). Draftkings was recently trading at around 3.4x EV/Estimated 2021 revenues -- which is less than internet consumer companies with less growth and smaller total addressable markets. Interestingly, SBTech and Gan have already made a strategic partnership once U.S. states start legalizing online sports betting en masse. We expect 30%+ revenue growth and roughly 30% contribution margin at least into 2025 as it continues to lead in market share in the U.S. (currently owns 35% market share of online sports bookmaking in New Jersey).

Playing for Profits With Video Gaming Stocks

Video gaming has been a beneficiary of the 'stay-at-home' theme during the Covid-19 pandemic.

Columnist Conversation

AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

Selling Some of This Surging AI-Related Stock

AAP Podcast With Portillo's CEO!

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.