Richard Goh, April 14, 2020
The explosive popularity of Animal Crossing has inspired me to write a piece on video game stocks.
____________________After Singapore declared that the country was undergoing a “circuit breaker closure” to prevent further spreading of the coronavirus, I was forced into recluse.
And I quickly found out that for a 21-year old student, I am oblivious to the latest trends in the video game industry.
Everywhere on Instagram and Twitter, memes of animal-looking villagers kept popping up.
I had no idea where they belonged to until a friend kindly explained that these characters were from the hottest craze this week: Animal Crossing. But The Wealth Wonka isn’t a blog that reviews games – so you may be asking where exactly is this headed?
The answer is: a 27% spike in Nintendo (NTDOY) since the game was released. That got me thinking. Most video game companies see a surge in their stock pricing when a new game is released. But this unusually large jump could be linked to the fact that hundreds of thousands are stuck at home with little else to do. Thus, I did a bit of digging around online.
The steady ascent of video game stocks
Since 20 Mar, Electronic Arts has climbed 18%. Ubisoft has risen 20%. And Nintendo climbed 27%.
These three names are some of the biggest video game companies globally. So, I decided to see if there were any other companies that were releasing a game soon and could prove to be potential flyers over the next month. I then scoped in on undervalued stocks and those with stellar fundamentals. Here were our two candidates:
1. Activision Blizzard (NASDAQ:ATVI)
The company recently released Call of Duty: Warzone on 10 March 2020. Joining the trend of battle royale games, it had more than 30 million players within two weeks of its release and became the fastest-growing non-mobile game ever. However, as of its release, shares grew from 57.35 to 61.30 at its peak – a pitiful 7% compared to companies above. This could be attributed to a poor showing when Warcraft III: Reforged earlier this year that has dampened investors’ optimism.
Still, its current price (April 7) of 58.96 is below its year-high of 64.37, and Q1 earnings are likely to beat analyst forecasts of $0.37 because of the sudden surge in demand for video games. With one of the highest EBIT margins across the sector at 27% and Call of Duty’s projected sales booming , this looks to be a short-term buy.
2. Nintendo (NTDOY)
Ta-da! Guess what? After hours of research, it turns out Nintendo still shows upward promise. Despite a surge in price, its P/E ratio is modest by industry standards at 23.41.
But our buy recommendation for Nintendo isn’t so much because of technical indicators but the long-term value it holds. Ever since the Switch was released in 2017, it has become a household must-have for the casual gamer. In May 2020, BioShock and Borderlands remakes are slated for release on the platform, possibly appealing to a whole new target audience. With the possibility for future collaborations with big-time gaming titles, Nintendo’s EPS is only expected to continue growing.
Its reported EPS for Q4 2019 already beat consensus estimates by 23% - $1.29 compared to $1.05 and beat actual estimates in Q4 2018 ($0.96) by 34%. With marketing efforts surrounding the Switch, Nintendo has shown a clear focus on digital sales, where it enjoys higher margins. Profitability rose by 19.5% from 2018 to 2019 and digital sales now make up a larger proportion of its revenue.
Therefore, we recommend Nintendo as a short-term buy.