Gaming has emerged as a major global entertainment source, offering stress relief and teamwork experiences, gaining popularity across all age groups. Last year’s macroeconomic challenges impacted spending on gaming, leading to a slowdown in demand.
However, the gaming industry is well-positioned for growth amid technological advancements and the rise in the number of gamers. Amid this backdrop, it could be wise to add fundamentally strong entertainment stocks Nintendo Co., Ltd. (NTDOY) and Electronic Arts Inc. (EA) to one’s watchlist. On the other hand, Unity Software Inc. (U) might be best avoided due to its poor fundamentals.
Before diving deeper into their fundamentals, let’s take a closer look at why the gaming industry is likely to grow.
The pandemic played a significant part in contributing to a surge in new players investing in games and consoles. The gaming industry has evolved from a once-in-a-while leisure activity to a more serious day-to-day pastime.
The rise of eSports, the growing popularity of mobile and online gaming, increasing internet penetration, faster connectivity through 5G, emergence of advanced technologies like artificial intelligence (AI), Augmented Reality (AR), and Virtual Reality (VR) are all contributing towards the growth of the gaming industry.
The global gaming market is expected to grow at a CAGR of 13.1% to reach $665.77 billion by 2030. Investors’ interest in gaming stocks is evident from the VanEck Vectors Gaming ETF’s (BJK) 35% returns over the past nine months.
Let’s take a closer look at the fundamentals of the featured stocks.
Stocks to Watch:
Nintendo Co., Ltd. (NTDOY)
Headquartered in Kyoto, Japan, NTDOY develops, manufactures, and sells home entertainment products in Japan, the Americas, Europe, and internationally. It also offers video game platforms, playing cards, Karuta, other products, handheld and home console hardware systems, and related software.
In terms of the trailing-12-month EBIT margin, NTDOY’s 31.49% is 267.8% higher than the 8.56% industry average. Likewise, its 17.29% trailing-12-month levered FCF margin is 134.8% higher than the 7.36% industry average. Furthermore, the stock’s 27.02% trailing-12-month net income margin is 820.5% higher than the 2.94% industry average.
NTDOY’s net sales for the fiscal year ended March 31, 2023, came in at ¥1.60 trillion ($11.33 billion). Its gross profit came in at ¥885.44 billion ($6.30 billion). The company’s profit attributable to owners of parent came in at ¥432.77 billion ($3.06 billion).
In addition, its operating profit came in at ¥504.38 billion ($3.57 billion). Its cash and cash equivalents end of the period increased 16.8% year-over-year to ¥1.19 trillion ($8.42 billion). Also, its net cash provided by operating activities increased 11.5% year-over-year to ¥322.84 billion ($2.29 billion).
For the quarter ended June 30, 2023, NTDOY’s revenue is expected to increase 20% year-over-year to $2.75 billion. Over the past nine months, the stock has gained 11.1% to close the last trading session at $11.22.
NTDOY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality. Within the Entertainment - Toys & Video Games industry, it is ranked #7 out of 19 stocks. To see NTDOY’s rating for Growth, Value, Momentum, Stability, and Sentiment, click here.
Electronic Arts Inc. (EA)
EA develops, markets, publishes, and distributes games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide. It develops and publishes games and services across various genres, such as sports, racing, first-person shooter, action, role-playing, and simulation, and licenses games from others.
In terms of the trailing-12-month levered EBITDA margin, EA’s 25.72% is 42.3% higher than the 18.08% industry average. Likewise, its 76.03% trailing-12-month gross profit margin is 53.3% higher than the 49.59% industry average. Furthermore, the stock’s 10.80% trailing-12-month net income margin is 267.9% higher than the 2.94% industry average.
For the fiscal year ended March 31, 2023, EA’s total net revenues rose 6.2% year-over-year to $7.43 billion. Its gross profit rose 9.8% year-over-year to $5.63 billion. The company’s operating income increased 18% year-over-year to $1.33 billion.
Its net income increased 1.6% year-over-year to $802 million. Also, its EPS came in at $2.88, representing an increase of 4.3% year-over-year.
Street expects EA’s EPS for the quarter ended June 30, 2023, to increase 147.8% year-over-year to $1.02. On the other hand, its revenue for the same quarter is expected to increase 22.6% year-over-year to $1.59 billion. The stock has gained 14.2% year-to-date to close the last trading session at $139.57.
EA’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. It has a B grade for Quality.
It is ranked #4 in the same industry. Click here to see EA’s Growth, Value, Momentum, Stability, and Sentiment ratings.
Stock to Avoid:
Unity Software Inc. (U)
U operates a platform that provides real-time 3D development tools and services. Its platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.
U’s 0.25x trailing-12-month asset turnover ratio is 59.3% lower than the 0.61x industry average. Its negative 63.42% trailing-12-month net income margin compares to the 2.01% industry average. Furthermore, its negative 58.83% trailing-12-month EBIT margin compares to the 4.39% industry average.
U’s operating expenses for the first quarter ended March 31, 2023, rose 49.3% year-over-year to $593.38 million. The company’s loss from operations widened 49% year-over-year to $254.98 million. Its net loss widened 42.9% over the prior-year quarter to $253.70 million. Also, its net loss per share widened 11.7% year-over-year to $0.67.
The stock has gained 15.3% over the past month to close the last trading session at $43.20.
U’s poor fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system.
Within the Entertainment - Toys & Video Games industry, it is ranked #16. It has an F grade for Stability and a D for Value. To see U’s rating for Growth, Momentum, Sentiment, and Quality, click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
NTDOY shares were trading at $11.13 per share on Wednesday afternoon, down $0.10 (-0.85%). Year-to-date, NTDOY has gained 6.81%, versus a 19.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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