Monday, July 4
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Is the Gaming Industry a Good Investment?

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At the start of the year, almost every news outlet was talking about the meteoric rise of GameStop’s share price thanks in large part to the r/WallStreetBets Subreddit, where thousands of people came together and decided to invest in the company.

After remaining relatively flat for much of the last 20 years, GameStop saw its share price rocket up from $16 in December 2020 to a high of $347.51 on 27th January 2021. After dropping back down to below $50 in February, it has continued to yo-yo up and down ever since.

While certain parts of the internet are encouraging each other to “buy the dips” and maintain their “diamond hands”, no financial advisor could recommend a client to buy the company. Similarly, no seasoned investor that isn’t engaging in pure speculation would have GameStop in their portfolio for the simple fact that the company’s earnings (or even potential earnings) do not support its current market capitalisation.

That said, other areas of the gaming industry could be good opportunities for investors, depending on their own investment goals and strategies. Entertainment and technology are two industries that have performed well in recent years, and gaming straddles both; therefore, gaming companies could be good stocks to own.

Hardware Companies

The last 12 months have been good for hardware companies. Off the back of the release of the Xbox Series S and X and the PlayStation 5, Microsoft and Sony have seen their share prices rise from the pre-release levels.

Even news that the companies are going to be unable to meet demand due to global shortages of silicon chips hasn’t dented investor sentiment too much.

Nintendo, which didn’t release a new console in the final few months of last year, has also seen its share price grow. From lows of 51,680 JPY in mid-November 2020, the company was trading at 68,540 JPY in early June 2021 (a 33% increase).

Whether this growth can be sustained remains to be seen, but all three companies have relatively modest P/E ratios, meaning they’re unlikely to be held back in the same way some other companies will be.

iGaming

Throughout 2020, we saw similar trends among iGaming companies. Several of them saw their share prices increase by double or more. Like others in the gaming industry, the explosive growth we saw last year has faded away, but most continue to sit at or near their all-time highs.

This is in line with what we’re seeing across most markets. The S&P 500 has been trading flat for a couple of months, as has the NASDAQ and other key US indices as traders wait to see how the economy will perform over the coming months.

iGaming companies are still enjoying strong performance though. Several have reported growing profit margins across their entire operations and are seeing rapid growth in expanding markets like the United States.

Innovation is also helping to attract a broader range of customers too. One way that brands are doing this is by offering exclusive online casino games like El Dorado The City of Gold. Other examples include video slots like Deal or No Deal Megaways and live dealer games like Quantum Roulette. This extensive variety means that the companies can appeal to players with different needs, helping them to grow.

Game Publishers

Just as hardware companies and iGaming companies have enjoyed a buoyant few years, so have publishers. They’ve shrugged off the sharp declines that saw companies like EA have their valuations halved in late 2018, to reach or exceed their all-time highs.

Much of their sales growth has come from microtransactions, a relatively recent development in the industry that allows publishers to continually monetise their content over many years, as opposed to the traditional model which required them to create new games every few years to unlock another big payday.

This actually has two effects. It’s extending the life of products, with games like Grand Theft Auto V and CS:GO getting close to 10 years old. This means development costs can be reduced, while revenues can be increased. Therefore, not only are revenues increased but so are profit margins.

The only downside is that most publishers are trading at much higher P/E ratios, which can be a sign that they are overpriced. You may, therefore, want to look carefully before deciding to buy any.

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