Video Game Companies: What do the numbers say?
Opdateret: apr. 20
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. The only company to fulfill this requirement is Electronic Arts, as they show great numbers. Not only are they above 10 % in all of the benchmarks but they are also growing continuously, which is exactly what we would like to see. Take Two underperforms in the older benchmark but is also growing continuously, and fulfill the requirements in the latest benchmarks. Activision Blizzard underperforms in all benchmarks, however we do see some growth in the later benchmarks.
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. While they are not increasing in every benchmark, they are certainly showing some great 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 rate in the latest benchmarks are negative and the oldest benchmarks do not impress.
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. Electronic Arts and Take Two show fantastic growth rates in all of the benchmarks. While Activision Blizzard show solid growth rates in most benchmarks, they are not as impressing as with the other two companies.
The Equity Growth Rate needs to be above 10 % as well. Electronic Arts meets the criteria as not only is it above 10 % in all benchmarks it is also continuously growing. Take Two has great numbers as well even though we do see a small decline in the latest benchmark, it is still way above the requirement and there are no reason to worry about that. Compared to the other companies Activision Blizzard is underperforming. However, in the latest benchmarks they do live up to the requirement and is growing little by little from each benchmark.
The final numbers we look into are the Cash Growth Rates. The growth rates of Electronic Arts were great in the oldest benchmark then they started to decline and now they are growing again. Even though they do not meet the requirement in one of the benchmarks they are definitely solid. Take Two has shown great cash growth rates historically but also seem to decline a bit. The latest benchmarks is in minus and is something that would need to be looked into, even though one year in minus shouldn't keep you from investing in the company. Activision Blizzard do not fulfill the requirements in any of the benchmarks and has once again underperformed compared to the other two companies.
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. Once doing so it shows that Take Two has no debt. Electronic Arts can pay of their debt in 0,13 years, while Activision Blizzard can pay of their debt in 1,78 years. It means that all of the companies meet the criteria of being able to pay of their debt in less than 3 years.
We have now gone through all of the numbers of the companies. It is hard to find a winner between Electronic Arts and Take Two. Looking at all of their historical numbers and their debt, I believe both companies look interesting and should be some companies that you should investigate further. I find that Activision Blizzard has underperformed historically and while their debt is indeed manageable and shouldn't keep you from investing in the company, it still larger than the other two companies, which is also something that you should take into account in case you want to invest in the gaming industry.
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 done my research on the companies and I might share them in a future post but unfortunately I cannot write a post on all companies I analysis, as my copiers should get some benefit from copying me.
I am available to copy but if you do your own trades, you can follow me instead or check out my portfolio every now and then. If you believe we are facing a volatile period in the stock market, I did share some of my other investment ideas in order to build your wealth in this post. I hope that you will find inspiration.
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