Gaming Stocks Primed for Strong Second Half

Chris Dios - August 9, 2019

Outlook for Gaming Stocks

The market is staring down a lot of uncertainty right now. Stalling global growth, coupled with a trade war between the world’s two largest economies, is a serious concern for investors. Could gaming stocks provide the safe haven many investors are searching for?

Most figures show that the economy is very strong. Stocks are still the best place to be, but investors should take extra caution during these uncertain times. It’s imperative to understand the companies you’re buying and the underlying factors that could affect your trade.

So what’s the best course of action for times like these? The textbook answer would be to shift assets into “safe haven” sectors, like utilities and consumer staples. The only problem with that strategy is everyone else has the same idea! Added demand for these assets is elevating valuations and eroding returns for investors who go this route.

Utilities aren’t having a great year. Valuations are actually 25% lower than they were last year, but utilities are underperforming the S&P 500 this year by about 1.5%. Most utility stocks offer stability and reliable dividends, but the sense of security comes at the cost of growth.

Last year, the consumer staples sector averaged 26.08 Profit-to-Earnings. This year, FUD has pushed valuations up to 42.07 P/E; a 61% increase! That’s an insanely high number for such a mundane asset class. It’s hard to imagine that the consumer staples sector can maintain these valuations for a prolonged period.

Strong Outlook for The U.S. Consumer

Recent economic data shows that the U.S. consumer is very strong. Unemployment is at record lows, wage growth is starting to pick up, and consumer confidence is at multi-year highs; creating a great environment for consumer discretionary stocks.

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Consumer Confidence Index at Multi-Year Highs

There are great opportunities in consumer discretionary stocks, but many of them also have inflated valuations. In addition, tariffs are hurting many retailers, so any bad trade headlines tend to weigh down the whole sector. The risks associated with trade are making retail a tough place to play, but where else can investors benefit from strong consumer spending?

One segment of the consumer discretionary sector looks like it could be a good answer: gaming stocks.

Video game stocks could be a great way to invest in a strengthening consumer. Gaming stocks had a slow start to 2019, so many of these companies are undervalued and offer great upside potential. Plus, video game developers have practically no exposure to Chinese tariffs. These gaming stocks could be a great way to bet on a strong consumer without exposing yourself to the major issues facing the overall market.

Watchlist: Best Video Game Stocks

Take-Two Interactive (NASDAQ: TTWO)

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Red Dead Redemption 2

Momentum Mover

Take-Two is one of the hottest video game stocks on the market. Its games include hits like Grand Theft Auto and Red Dead Redemption. The company crushed its earnings estimates last week; surpassing consensus estimates by about 700%. Digitally delivered merchandise accounted for 77% of total revenue, and spending on downloadable add-ons and in-game purchases made up 54% of that total.

The unexpected beat set off a big rally the stock, but there’s still room for upside.  Share prices are trending upward and are now approaching a key milestone. If TTWO can break through its 52-week high at $140 it’s a clear sign that this bull still has gas left in the tank.


Best Performer

Mobile gaming accounts for an increasingly large portion of the overall gaming market, and Zynga is one of the leaders in the space. The company’s hits include games like Words With Friends and Farmville. Zynga missed on its most recent earnings report, earning 4 cents per share against consensus estimates of 5 cents, and sent shares sliding over 7%.

However, even with the recent setback, Zynga is still one of the best performing video game stocks of 2019. it’s up over 94% since the beginning of the year. Valuations are elevated but this recent slide could create an excellent entry position for dip buyers. If you like the mobile gaming industry, take a strong look at Zynga.

Activision-Blizzard (NASDAQ: ATVI)

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COD: Modern Warfare; Fall 2019

Good Value

Activision is the largest video game company by market capitalization, and its assets include hit franchises like Call of Duty, Candy Crush, and Warcraft. The stock has struggled this year. Shares got slammed, along with the rest of the market, towards the end of 2018. Most of the market recovered from that sell-off, but ATVI hasn’t been able to recapture the ground it lost.

ATVI traded in a tight range between $42 and $50 for most of the year, but that’s significantly lower than its 52-week high of $82. It could be an excellent buy for long-term investors seeking value. Activision will get its feet back under it eventually but the question is, when? Its currently trading for only 21.1 P/E, significantly less than the sector at large.

Electronic Arts (NASDAQ: EA)

Best Value

EA is another huge video game company with a great library of intellectual property, including the Battlefield series and Madden Pro Football. One of the company’s most promising new titles is a free-to-play game called Apex Legends. It’s the company’s answer to Fortnight and the game’s rapidly-rising popularity is an encouraging signal for investors.

EA can’t be beaten from a value perspective. It’s trading for only 12.94 P/E; that’s about 67% less than the industry average. Remember, this is one of the top video game developers in the world! At a multiple like that, it’s hard to pass up. The stock has been somewhat volatile over the last week but, at these valuations, it’s hard to imagine that EA won’t be a winner in the long-term.

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Resident Evil 2


International Exposure

CAPCOM is a Japanese video game developer and publisher with a long history hit titles and a portfolio of popular franchises. It’s a foreign company, but U.S. investors can buy shares via OTC markets. Also, be aware that Share prices can be affected by currency exchange rates between the USD and Japanese Yen.

CAPCOM is a great company to own if you’re looking for some foreign exposure in your portfolio. The firm is an early pioneer of the video game industry and its properties include new hits, like Monster Hunter, and classics like Resident Evil, Mega Man, and Street Fighter. The company is delivering impressive revenue growth and it has a policy of returning roughly 30% of its trailing earnings to shareholders by way of a dividend. If you’re looking for some international variety in your gaming stocks, check out CAPCOM.

The Best Gaming Stocks and Much More

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Chris Dios is an American writer and entrepreneur based in the Greater NYC area.

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