There are lots of individual share options for investors interested in gaining exposure to the video gaming sector, from the game developers and publishers to the game console makers like Sony (SONY:NYSE) and the chip makers supplying components such as Nvidia (NVDA:NASDAQ).

In this article we will look in more detail at the investment options and discuss the dynamics and context around the industry.

Nvidia is a bit of an outlier with its shares surging 190% over the last year fuelled by demand for high end AI (artificial intelligence) chips following the rapid success of OpenAI’s ChatGPT.

The company also makes superfast chips for the gaming industry and runs a gaming streaming service.

Investors can get indirect exposure via video gaming services providers such as Keywords Studios (KWS:AIM) and Zoo Digital (ZOO:AIM).

These firms provide a range of services from localisation-based services such as dubbing and subtitling to game testing and design.

DOMINATED BY OVERSEAS STOCKS

Most of the big names are either listed on the US or Japanese stock markets so investors would need to be comfortable with investing in overseas markets and dealing with foreign currencies.

Examples of stocks you can buy include Microsoft (MSFT:NASDAQ) which makes the Xbox console and owns over 20 games studios. It recently closed the biggest ever deal in the sector after buying Call of Duty maker Activision Blizzard for $69 billion.

PlayStation console maker Sony is also on the stock market alongside Switch console manufacturer and Mario games publisher Nintendo (7974:TYO).

It is tricky to buy Nintendo shares directly but it is a top 10 holding in Lindsell Train Investment Trust (LTI), T Rowe Price Japanese Equity (BD446L1) and  Vaneck Video Game and eSports ETF (ESPO).

Investors looking to buy shares in a gaming studio have multiple options including football sim and Medal of Honor group Electronic Arts (EA:NASDAQ); Take-Two Interactive (TTWO:NASDAQ) whose subsidiary Rockstar Games makes the Grand Theft Auto franchise; and the eponymous maker of gaming platform Roblox (RBLX:NASDAQ) which is popular with pre-teens children.

The UK stock market includes a few smaller games companies including Frontier Developments (FDEV:AIM) and Team17 (TM17:AIM).

An alternative is to invest in a fund which provides diversified exposure to the sector.

For example, Global X Videogames & Esports ETF (HERU) tracks a basket of shares that are relevant to the gaming sector. Its portfolio includes stakes in Nintendo, Electronic Arts, Take-Two Interactive and Roblox as well as Japanese games developers Konami and Capcom among others.

Not all the best-selling video games are publicly owned. For example, the hugely popular game Fortnite which, has sold more than 350 million copies is privately owned by Epic Games.

While founder and CEO Tim Sweeny holds 50% of the company, Sony owns around 5% and Chinese entertainment company Tencent Holdings (0700:HKG) owns around 40% of the company.

However, according to documents released by Apple (APPL:NASDAQ) relating to a legal battle to get Fortnite on its App Store, Epic Games is not yet profitable.

The company reportedly lost between $100 million and $200 million annually from 2019 through 2021. Epic Games is believed to be considering floating its shares on the US stock market, so it may yet become a public company in the future.

HOW HAS THE SECTOR PERFORMED?

It has been a rough year for UK listed video gaming companies, with share prices down 67% on average.

Over in Europe, shares in French video gaming company Ubisoft (UBI:EPA) are down 14% over the same period. In contrast US groups Take Two Interactive Software, Microsoft, Electronic Arts and Roblox are up by around a third on average. Meanwhile, the Japanese duo of Sony and Nintendo have averaged gains of 20%.

WHAT IS THE OUTLOOK FOR VIDEO GAMING?

An estimated 2.77 billion people will play video games next year, rising to 2.86 billion in 2025, according to figures from Statista. That compares with 1.72 billion in 2017, illustrating the rapid growth in the industry.

Consumers have been merrily spending for much of 2023 as they run down savings amassed during the various pandemic lockdowns. However, there are signs this spare cash is running out, particularly in the US where more people are now turning to ‘buy now, pay later’ and credit cards to fund spending.

Video games are not cheap, and several publishers have recently flagged disappointing sales of titles.

There is a lot of content available, and competition is fierce for gamers’ money. That said, pockets of the sector could still do well as they are seen as ‘must-have’ products.

The sector’s saving grace could come in the form of new hardware next year.

There are widespread rumours that Nintendo will release the Switch 2 in 2024 which could drive a new wave of consumer spending across the sector.

New hardware is typically a catalyst for gamers to upgrade their home systems. The original Switch console has been hugely successful, selling more than 132 million units since launch in 2017.

Technology has come a long way over the past six years and so gamers might be eager to buy the new model of Switch if it offers better graphics and performance than the original.

That said, historically launching new hardware has not always gone smoothly for Nintendo which might explain why the company has been slow to upgrade the console.

Lead manager James Harries of the Trojan Global Equity Fund (FUND:B0ZJ5S4) which owns shares in Nintendo, told Shares the company has had issues introducing newer but less popular upgrades in the past.

The other big catalyst for the gaming sector is the 2025 launch of Grand Theft Auto 6, which will arrive more than 10 years after the previous instalment of the successful franchise.

This could set new sales records for a game, particularly as it is expected to be launched across both the PlayStation and Xbox at launch, thus widening the net for potential customers.

ARE GAMING SHARES A GOOD INVESTMENT?

Video games are a big business and there is serious money to be made for companies with blockbuster titles. Earnings growth is a long-term driver for share price growth and history has shown that many of the successful companies in the gaming sector have delivered strong share price gains.

However, it is important to consider that past performance for a stock is not a prediction of what will happen in the future. Creating and selling blockbuster games is just a small part of the overall strategy for the most successful gaming companies. Firms like Nintendo have shown the power of creating strong, timeless gaming brands by taking them into new areas such as merchandise and films.

Monetising IP (intellectual property) which protects brands from copycat competition is one of the most important legs of the overall strategy. A good example is Nintendo’s loveable Italian tradesman Mario who has featured in over 200 games since first appearing in 1981 as ‘Jumpman’ in the first Donkey Kong game.

The Super Mario Brothers movie is on course to be the second largest grossing film of 2023, generating $1.4 billion at the box office. The Japanese company financed half of the $100 million budget and is entitled to 50% of the profits after Universal Pictures recoups its costs.

More importantly, the movie’s success has led to increasing sales of the Switch console. The firm sold 4.3 million copies of Super Mario Bros. Wonder within the first two weeks of launch in October 2023.

The launch marks the first entirely new instalment of the game in over 40-years and its robust performance is the best of any Super Mario game according to Nintendo, demonstrating the effectiveness of its strategy.

WHAT ARE THE RISKS OF INVESTING IN GAMING?

The key risks facing investors include affordability as games are expensive purchases; companies failing to meet deadlines for big title releases; heightened competition leading to poor sales of new and old titles; and coding errors which cause bugs in games and make them a poor experience for players.

A recent example of a firm failing to meet deadlines and suffering from coding bugs is fantasy games maker Frontier Developments. The once high-flying Cambridge-based video games group has been hit by a series of profit warnings, the last one causing its shares to slide over 20% in a single day.

The latest slump came after the firm cut its full-year sales guidance for 2024 following weaker-than-expected Black Friday sales of the Warhammer game Age of Sigmar: Realms of Ruin.

Larger firms which have developed a diversified portfolio of games titles and enjoy strong sales from back catalogues are less vulnerable to the risk of single game hiccups impacting the overall business.

 THE KEY METRICS FOR VIDEO GAMING

Being successful in video gaming is all about getting as many customers playing as possible for as long as possible. There are a few basic metrics which help investors understand the key trends and compare performance across companies.

Industry benchmarks will differ based on the type of game and how it is monetised. Examples include free to play, in-app purchase or subscription)

The number of daily or monthly active users (DAU and MAU) is useful for gauging the popularity of a game and revenue potential while average revenue per user (ARPU) gives an idea of how much revenue each customer is generating.

The revenue line usually includes direct games sales, streaming subscriptions, downloadable content, and royalties.

For example, a company generating £1 million in annual revenue from 100,000 active users would equate to an ARPU of £10.

User acquisition cost (UAC) refers to the cost of acquiring new customers which is useful for gauging how efficient a firm’s marketing strategies might be and the return on investment.

For example, a company which spends £10,000 on marketing which generates 2,000 new active customers would equate to a UAC of £5.

Lifetime value is an estimate of the total sales value an average customer generates over the lifespan of playing a game.

For example, a mobile game which has an ARPU of 50p per month and average lifespan of eight months would equate to a lifetime value of £4.

HOW WILL MICROSOFT’S ACTIVISION PURCHASE CHANGE THE INDUSTRY?

Microsoft’s purchase of Activision Blizzard is a potential game changer for the industry. The deal boosts Microsoft to the number three spot by gaming revenues behind Sony and Tencent.

After months of investigations, regulatory pushback resulted in concessions whereby Microsoft has granted cloud streaming rights for all Activision Blizzard’s current and future games outside the European Union over the next 15 years to Ubisoft.

Streaming games from the cloud works like Netflix (NFLX:NASDAQ) with users paying a subscription to access games instead of paying for a game outright.   

The big players in video game streaming are Microsoft’s Game Pass, Ubisoft +, Sony’s Play Station Plus and Nvidia’s GeForce NOW. Despite Ubisoft having streaming rights Microsoft stands to benefit from downloadable content, royalties, and in-game purchases.

According to Statista, Activision generated $5.9 billion from such transactions in 2022 which dwarfs the $1.6 billion it raked in from game sales. One of the obstacles to closing the Activision deal was a concern that Microsoft would make Call of Duty an exclusive franchise for its own Xbox console, but the company has made commitments to allow all gamers access.

The acquisition is expected to boost Microsoft’s presence in mobile gaming with Activision enjoying 368 million monthly active users.

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