It’s been a rough 2022 for video-game stocks, as consumers have shifted spending to other areas, with the pandemic waning and inflation lifting costs of essentials.
The VanEck Video Gaming and eSports ETF (ESPO) has dropped 34% year to date.
Bank of America analysts don’t see a strong outlook ahead, as its economists anticipate a recession next year. But there are opportunities.
“We expect video game sales to fall by 4% to 6% in a forthcoming 2023 recession, much more moderate than the 20% decline seen in 2009,” they said.
That’s because the bank expects a tamer recession than the Great Recession of 2007-09 and because of video game publishers' diversification into live services and subscriptions, which the analysts see as more recession-resistant revenue sources than in the past.
BofA’s Three Buys
So there are still gaming stocks that the BofA analysts rate as buy. That includes:
· Electronic Arts (EA), which they call “a quasi-consumer staple: [the] top pick in a recession.” The analysts have a price target of $155 for the stock, compared to the recent quote of $121. EA franchises are consumer staples of the video game industry because of “their hardcore gamer communities and dominant brands,” the analysts said. “EA's AAA titles (FIFA, Apex Legends, etc.) should be resistant to a recession.” That’s because “gamers are more likely to pull back on obscure, new-to-market titles than their longtime favorites,” the analysts said. “The shift into live services ([estimated at]75% of fiscal 2024 sales) and lower exposure to casual mobile (11% of fiscal 2024 sales) also strengthen the case for EA.”
· Roblox (RBLX). It’s a “secular grower and children-spending resistant,” the analysts said. They have a price target of $54, compared to a recent quote of $37. “RBLX is poised to benefit from secular growth catalysts that should counter a recession,” they said. That’s “innovative technology (layered clothing, dynamic heads, real time facial animation) and new business lines (immersive ads),” the analysts said. Spending by Roblox’s core users – 9- to 12-year-olds in the U.S. and Canada -- “should show resilience in an economic downturn if past recession-period data provide any guide,” they said. “Its increasingly important social function (similar to Meta (META), TikTok etc.) also differentiates it from video games and makes it stickier for some players.”
· AppLovin (APP). It’s “advantaged in a challenging mobile ecosystem,” the analysts said. They have a price target of $43, compared to a recent quote of $22.11. AppLovin benefits from “ad networks' strong market position versus mobile gaming companies,” they said. “Its pricing power could help dampen recession impacts, even as total ad spending falls when the economy weakens,” the analysts said. “Growth initiatives such as MoPub DSP integration and ALX Header Bidding should drive additional revenue growth.” And, “rationalization of the gaming business should support [profit] margins and help preserve capital in a market downturn,” the analysts said.
