Video game stocks soared during the Covid pandemic lockdowns, but declined after the world reopened. Now with an uncertain economy, video game fans are being more cautious with their spending, adding more woes for the beaten-down sector.
Shortages of console hardware, especially Sony's PlayStation 5, and game release delays have contributed to disappointing sales lately, analysts say. But there are reasons for optimism.
"We're bullish on the sector," said David Cole, principal analyst for DFC Intelligence, a research firm that tracks digital entertainment. "We're finally getting beyond the tough comparables from Covid."
Hardware shortages are easing and big new game releases are planned for the months ahead, Cole said.
On the hardware front, Sony on Feb. 2 raised its PlayStation 5 sales forecast for the fiscal year ending in March to 19 million units from 18 million. The company said chip shortages that have hindered production since its launch in November 2020 have eased.
Video Game Stocks In The Cellar
Meanwhile, major games set for release in the first half of 2023 include "Star Wars Jedi: Survivor" from Electronic Arts and "The Legend of Zelda: Tears of the Kingdom" from Nintendo. Other big titles are "Starfield" from Microsoft's Bethesda studio and "Diablo 4" from Activision's Blizzard Entertainment unit.
But for now, investors are staying clear of video game stocks.
IBD's Computer Software-Gaming group ranks No. 170 out of 197 industry groups for recent stock market performance. The group contains 22 video game stocks, including top game publishers Activision Blizzard, Electronic Arts and Take-Two Interactive Software. The largest company by market cap currently is Activision, followed by China internet firm NetEase.
Video game stocks as a group peaked in mid-2021 as Covid vaccines became more widely available.
Blaming The Weaker Economy
Some video game publishers, like EA and Take-Two, blamed a weaker economy for their disappointing holiday-quarter results. However, others like Activision and Sony delivered strong sales and earnings in December quarter.
Take-Two Chief Executive Strauss Zelnick said macroeconomic factors could weigh on video game sales throughout 2023.
"As we look at the rest of the year, we want to be realistic as always, and we do see softness in the overall economy that is putting pressure on sales of console titles," Zelnick told Investor's Business Daily. "I'm hopeful that by the end of calendar 2023, we'll be in a pretty good place."
DFC Intelligence's Cole has a different take.
"The economy and consumer spending issues are excuses by companies when they don't perform," Cole told IBD.
Consumers Sticking With Popular Franchises
Video game buyers now are sticking with established game franchises rather than trying games based on new material, analysts say. Those popular franchises include Activision's "Call of Duty" series and Sony's "God of War" series, both of which had top-selling games in the December quarter.
"Consumer wallets have clearly tightened for everything but the blockbusters," KeyBanc Capital Markets analyst Tyler Parker said in a recent note to clients. "Q4 results show really only the blockbuster releases are safe near-term."
He added, "Expectations are likely to remain subdued across the space near term unless we get releases to be excited about."
For Take-Two, investors continue to focus on the yet-to-be-announced launch of "Grand Theft Auto 6." Most analysts think the game will come out in 2024.
Three Big Questions For Video Game Stocks
Several big questions hang over the video game industry. They include: Will Microsoft be able to appease antitrust regulators and complete its planned acquisition of Activision? When will Nintendo announce a successor to its aging Switch console? And will virtual reality gaming get a boost from the Feb. 22 launch of Sony's PlayStation VR2 headset.
Microsoft's $69 billion purchase of Activision has been delayed by regulatory challenges in the U.S. and Europe. Analysts say Microsoft will need to make assurances that Activision games will continue to be made for rival consoles, not just its Xbox hardware.
As for a Switch follow-up, Nintendo probably won't come out with new hardware until late 2024, Cole said.
And PlayStation VR2 is likely to be a niche product, Cole said.
"The expectations have been kept pretty low," Cole said. "People have soured on VR gaming."
Attractive Valuations For Video Industry
Meanwhile, video game stocks have been beaten down for so long that they have attractive valuations now, Cowen analyst Doug Creutz said in a recent report.
"We remain bullish on the video game space," Cowen said. "We expect a return to growth in consumer spending in 2023, which should significantly benefit sentiment."
He has buy ratings on Take-Two, EA, Sony and Playtika.
"Sentiment on our covered video game companies remains largely negative," he said. "However, we do think the group is also fairly washed out and that video games are regarded as a reasonable place to hide in a potential recession due to their business resiliency in 2001 and 2008."
Editor's Note: An earlier version of this article incorrectly identified the Sony PlayStation 5.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
