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5 Picks for Solid Returns Amid Coronavirus-Led Gaming Surge

Coronavirus-led lockdowns and shelter-in-home guidelines have boosted video games and e-sports user engagement as access to outdoor games has been cut off. Even as several states in the United States are easing lockdowns, mass gatherings and outdoor sports have been restricted for an indefinite period of time.

This has helped the video game industry gain an edge over the other entertainment businesses. Per Newzoo’s research report, the global video game market is expected to reach $159.3 billion in 2020, nearly four times box-office revenues and almost three times music industry revenues in 2019, which totaled $43 billion and $57 billion, respectively.

Technological breakthroughs have also helped industry players expand user base. Technavio, which monitors the gaming software market, reported that the market is poised to grow by $65.19 billion during 2020-2024, at a CAGR of more than10%.

Video Games Score Big Amid Coronavirus Pandemic

Per the NPD Group report, consumer spending on video gaming in the United States reached a record $10.86 billion in the first quarter of 2020, up 9% year over year across digital console and PC content, mobile and subscription spending including hardware and accessories categories.

Moreover, U.S. gaming industry witnessed record sales across hardware, software, accessories and game cards, totaling $1.5 billion (up 73% year over year) in April, beating the earlier U.S. record of $1.2 billion set in April 2008.

Final Fantasy VII: Remake stood out as the best-selling game, followed by Activision Blizzard’s ATVI Call of Duty: Modern Warfare and Nintendo’s NTDOY Animal Crossing: New Horizons.

Overall, software sales hit $662 million in the month, topping the previous record of $642 million set in April 2008. Hardware sales also did well, with hardware spending jumping 163% year over year to $420 million.

Technology Playing a Major Role

Thanks to the recent technological breakthroughs, there has been drastic growth in the gaming space. Advancement and availability of 5G, AR, VR and cloud gaming are making things better.

Notably, AR/VR provides an immersive gaming experience that is almost akin to a second reality.

Moreover, consumers these days buy fewer games but spend more time on them. Hence, publishers have shifted the business model from single-unit to recurring revenues generated from a base of active users.

The recent trend of multi-player mobile gaming has also helped game publishers reap profits. The majority of these games are free-to-play and do not require costly gaming consoles or other devices. But these free-to-play games come within-game purchases, which eventually generate revenues for publishers.

Globally, the mobile games market is expected to grow 13.3% year over year, with estimated revenues of $77.2 billion in 2020, per a Newzoo report.

Fortnite, the most popular game globally, is completely free-to-play but it alone generates more than $1 billion in annual revenues. This shows that the in-game purchase model helps game publishers to generate sufficient income to meet operating payments and also allows growth while maintaining service levels.

Our Picks

Given this sudden surge in sales and upbeat sentiment in the video gaming industry, investors can tap the following stocks as these are well-poised to beat the coronavirus-related headwinds on strong fundamentals. Notably, all five stocks have outperformed the S&P 500 composite on a year-to-date basis.

Year to Date Perfomance

 

Activision Blizzard reported that nearly 50 million people played the Call of Duty: Modern Warfare game in the first quarter, while Overwatch, a team-based multiplayer first-person shooter developed by Blizzard Entertainment, was accessed by 50 million.

Strong popularity of its franchises is expected to boost in-game spending, thereby driving net bookings and the top line of this Zacks Rank #1 (Strong Buy) company in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, the King division is benefiting from strength in the Candy Crush franchise’s popular games like Candy Crush Saga and Candy Crush Friends Saga.

Tencent Holdings Limited’s TCEHY famous online multiplayer battle royale game, PlayerUnknown's Battlegrounds (PUBG) has more than 200 million users. Year on year, online games revenues increased 31%, with PUBG mobile contributing to majority gains.

This Zacks Rank #1 company is expected to benefit from a solid video game portfolio that includes Peacekeeper Elite and Honour of Kings.

Take-Two Interactive TTWO is expected to gain traction from sturdy demand for NBA 2K20 and NBA 2K19, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, and Sid Meier’s Civilization VI plus WWE SuperCard and WWE 2K20. Games like Borderlands 3, Ancestors: The Humankind Odyssey and The Outer Worlds further strengthened this Zacks Rank #1 company’s  portfolio.

Electronic Arts EA which has a Zacks Rank #2 (Buy), is benefiting from solid demand for popular franchises including Apex Legends, FIFA, Madden NFL, The Sims 4, Need For Speed Heat, Star Wars Jedi: Fallen Order and Battlefield.

Nintendo is expected to gain an edge from the popularity of its Switch video game console. The company sold a record 11.8 million units of Animal Crossing: New Horizons in March, making it the best Switch launch since the device was released in 2017.

Moreover, this Rank #2 company’s partnership with Tencent allows the latter to publish Super Mario Odyssey and Mario Kart 8 Deluxe in China, the world’s largest gaming market. This bodes well for Nintendo’s growth prospects.

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