US Video Game Stocks That Withstood COVID-19, Now It's Time to Take a Break

Game Revenue Maintained but Hardware Sales Decline
Impact of Semiconductor Shortage... Increased Outdoor Activities Also a Concern

A participant is trying out a game at E3, the world's largest game exhibition held in Los Angeles, California, USA, in 2019.
[Image source=EPA Yonhap News]

[Asia Economy Reporter Minwoo Lee] With the distribution of COVID-19 vaccines, the stock prices of U.S. video game companies are expected to stagnate. Although video game sales in the first quarter remained similar to the same period last year, the stock prices are at a high level compared to future earnings growth rates, making it difficult to expect excess returns.

On the 13th, KB Securities emphasized that, given this background, it is necessary to respond on a stock-by-stock basis reflecting new releases rather than investing in the entire U.S. gaming industry sector.

In fact, despite increased outdoor activities, game demand remains steady. According to NPD Group, U.S. video game sales in April this year amounted to $4.6 billion (approximately 5.14 trillion KRW), down 2% compared to the same period last year. This is due to the significant sales increase last year caused by COVID-19. However, sales from January to April this year reached $19.6 billion, a 21% increase compared to the same period last year. Content sales increased by 2%, but hardware and peripherals decreased by 30% and 23%, respectively. However, this was explained as being more due to semiconductor supply shortages than demand.

There are concerns that overall gaming stocks are overvalued compared to the market. KB Securities analyst Sehwan Kim explained, "Overall, the return on equity (ROE) of gaming stocks is rising, so continuous stock price increases are expected, but due to last year's performance boosted by COVID-19, most earnings per share growth rates are below the market average."

In fact, the compound annual growth rate (CAGR) of earnings per share for S&P 500 companies from 2021 to 2023 is 19%. Activision Blizzard (10.3%), Take-Two Interactive (10.0%), Electronic Arts (EA) (9.7%), Roblox (3.2%), Nintendo (-5.6%), and Sony (-7.7%) are all below this. Meanwhile, the 12-month forward price-to-earnings ratio (PER) remains higher than the market. In the case of Roblox, the 12-month forward PER has exceeded 200 times. Reflecting this, the price/earnings to growth (PEG) ratios are 2.3 for Activision, 2.3 for Electronic Arts, 3.5 for Take-Two, and 62 for Roblox, all exceeding the market average of 1.1.

Companies selling console devices such as Microsoft (MS), Sony, and Nintendo are expected to face difficulties in production and sales due to semiconductor supply shortages until next year. According to market research firm Newzoo, the console game market is estimated to decline by 8.9% compared to the previous year. Nintendo's Switch sales have already dropped by 11.5%, and Sony's PlayStation 5 sales reached only 7.8 million units in the four months since its release. Analyst Kim pointed out, "Other concerns include reduced outdoor activities due to the easing of COVID-19 restrictions and intensified competition."

This content was produced with the assistance of AI translation services.