Investment in the gaming sector brings no amusement for financiers.
The gaming sector, encompassing mobile, video, and computer games, is projected to witness staggering growth. Yet, promising returns for investors in gaming developers, producers, and providers aren't a given. Investors have recently found the industry's growth disappointing.
The Gamescom fair in Cologne is attracting record-breaking crowds: 1,400 exhibitors and over 320,000 visitors last year, with projections for an even higher number. Contrary to Germany's slumping gaming industry - with a decline in game and related hardware and online service revenues in the first half of 2024 - the global market is showing no signs of slowing down. According to one study, 3.3 billion individuals worldwide played on their smartphones, computers, or consoles in the previous year, which equates to 40% of the global population. This trend is showing no signs of abating. Analysts at Landesbank Baden-Württemberg (LBBW) predict a rise in revenues from $184 billion in 2022 to $665 billion by 2030.
However, this exponential growth should not be misinterpreted as a guarantee of equal returns for investors. Shares of game developers have been performing subpar lately. The Morningstar Global Electronic Gaming and Multimedia Index is still around 20% below its peak in spring 2021, when game developers seemed like one of the COVID-19 crisis's big winners. Despite the industry's subsequent robust growth, it has not managed to live up to the inflated profit expectations of the time.
Game developers' margins lag behind those of other tech and online industries. Competition within the gaming sector is fierce, according to a Morningstar analysis. The relatively low barriers to entry for simple smartphone and online games allow for a large supply, whereas the developers' margins struggle to keep up.
Even at the high-end of the market, with technically and artistically complex games, margins often remain low. Development and production expenses "chomp on profits," states ntv stock market expert Sabrina Marggraf. "The stock market performance highlights the challenge some companies face in delivering outstanding results despite substantial revenues," she adds. For instance, Europe's market leader Ubisoft, known for game hits like Assassin's Creed and Prince of Persia, has seen a significant loss of its stock market value over the past three years.
Nonetheless, analysts identify promising opportunities for investors in certain game developers. Morningstar rates game developers Take-Two, Electronic Arts, and Roblox as undervalued. These US companies have successfully built a loyal and paying user base despite intense competition. Nintendo and Sony, who also offer hardware, utilize different strategies compared to pure software companies.
Both stocks are recommended for purchase by the majority of analysts. However, while Sony recently increased its profit predictions for the financial year following a strong first half of 2024, Nintendo had to report a decrease in sales. Particularly, demand for Nintendo's Switch console has experienced a decline. Nevertheless, the company anticipates a surge in sales due to the release of the new Switch console generation, Switch 2, later this year.
Microsoft is also a major player in the gaming market. The company offers the popular Xbox console and, following its $68 billion acquisition of developer Activision last year, is also among the leading game developers. However, Microsoft's stock performance has been more influenced by other aspects of the company's business, such as cloud computing and its tie-up with OpenAI, the creators of ChatGPT.
Last July, AI enthusiasm propelled Microsoft's stock to an all-time high of over $430. Since then, the stock has dropped by around a fifth due to growing AI cynicism and underwhelming results from the cloud division.
The Gamescom fair, held annually in Cologne, continues to draw massive crowds, with advances in recent years leading to record-breaking attendance. Despite Germany's gaming industry facing challenges in the first half of 2024, the global gaming market at Gamescom showcases no signs of slowing down.
