Video Game Companies: What do the numbers say?
Opdateret: 3. maj 2022
I have previously looked through the numbers on various companies in the solar sector. Another sector I'm very interested in is the video game sector. Instead of making an analysis of a single company I have decided to go through the historical numbers of the largest companies that trades on the U.S. stock exchange.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
This post will be a bit different than my usual posts. I will not do an analysis of a specific company and calculate a buy price, as I have previously done. In case you have missed it, you can read my latest analyses about Lockheed Martin or Amazon. I haven't opened a position in any of the companies yet, as my buy price hasn't been triggered. However, if you feel like my calculations are unrealistic, you can read my analysis on Ulta Beauty, which I wrote prior to the company hitting my buy price.
I have always loved paying videogames. I'm old enough to have had a Commodore 64 and Amiga 5. I also had the Nintendo Entertainment System and afterwards a Playstation 1. The latest console I have is the Playstation 4, while I also have a PC. Unfortunately, I do not have as much time for gaming as I used to but I still think I have some knowledge about the gaming industry. However, so far I do not have any of the game developers in my portfolio (I do have Sony, Tencent and Microsoft), so I thought it was time for me to look into the numbers.
It is a sector I see a great future in. However, you do not only have to take my word for it. According to a report from Newzoo, it is expected that the global gaming market will generate more than $200 billion in revenue by 2023, while a report from Mordor Intelligence forecast it to reach a value of $256,97 billion 2025 (from $151,55 billion in 2019). Needless to say that a sector with such a projected growth is interesting for most investors, including myself.
In this post I will look through the historical performance of the largest video game developers, as historical performance is an indication of how it will perform in the future. Keep in mind that I'm only looking at the numbers, and this post is not considered to be an analysis of the companies. It is just in order for you to get some context.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. None of the companies live up to the requirement. Electronic Arts does in all benchmarks except for the newest one. Activision Blizzard and Take Two Interactive both started slow but live up to the requirement in the newest benchmarks. When I see numbers like these, I would probably prefer the companies with momentum.
The next numbers we will look into are the Sales Growth Rates. We would like the Sales Growth Rate to be above 10 % in all benchmarks and Ideally we would like to see the numbers increase in every benchmark. Looking at sales growth the best performing company is Take Two Interactive. While they are not increasing in every benchmark, they are certainly showing some good numbers. Electronic Arts do show positive numbers in all benchmarks but the sales growth rate to leave a lot to desire. Activision Blizzard's sales growth rates are a bit of a mixed bag between some good years and some underwhelming years.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Activision Blizzard does live up to the requirements in all of the benchmarks. Take Two Interactive show fantastic growth rates in all of the benchmarks except one. While Electronic Arts have had some bad years of late.
The Equity Growth Rate needs to be above 10 % as well. Take Two Interactive is overall the best performer of the the three companies when looking at the equity growth rate. They are well above the required 10 % in all of the benchmarks. Both Activision Blizzard and Electronic Arts have one benchmark in which they do not live up to the requirements. It is interesting though that it is the oldest for Activision Blizzard and the newest for Electronic Arts.
The final numbers we look into are the Cash Growth Rates. The growth rates of all of the companies are mixed. Take Two Interactive is the only of the three companies that lives up to the requirement in three out of five benchmarks, and in the newest benchmark they are nearly there. Activision Blizzard has some great years like last year but also very underwhelming years like the 3 year benchmark. Once again we see the same tendency with Electronic Arts being that the oldest numbers are better the the newest.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. None of the companies have significant debt and all of them live up to the requirement of being able to pay off debt in 3 years. Once again the best performing company is Take Two Interactive, as they have no debt. Activision Blizzard can pay off their debt in 1,64 year, while it is 2,24 for Electronic Arts.
We have now gone through all of the numbers of the companies. It wasn't hard for me to pick a winner out of the three companies. The winner is Take Two Interactive, as I believe they have the best numbers overall. Based on the numbers, I find Activision Blizzard interesting as well but I would need to do more research on the company. Electronic Arts is a company I really like, as I usually prefer sport games but it is a bit concerning that the numbers show that they currently doesn't have much momentum. In case I should invest in Electronic Arts, I would certainly need to dig deeper into the numbers.
Remember that you should not invest in a company based on the historical numbers alone. You would need t further investigate the companies in order to see if they have a moat and good management. Once you have done so, you would also need to calculate a buy price, in order to be sure that you buy it at a good price. I have made an analysis of Take Two Interactive, where you can find what my buy price would be. You can find the analysis here.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.
I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.
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