Video game

3 cheap video game stocks | the morning star

The year is just beginning and the video game market is already buzzing with action. Leaps in technology and a growing wave of consumer demand for mobile games have caught the attention of big tech players, sparking a wave of mergers and acquisitions in the video game industry.

The year has already seen two major multibillion-dollar acquisitions aimed at grabbing the lion’s share of the transforming global video game market, which is expected to skyrocket from US$178 billion in 2021 to US$268 billion. US dollars by 2025.

The following gaming powerhouses are dominating the industry undergoing evolutionary changes, including subscription plans and cloud gaming. These players have the means to innovate quickly and differentiate their product offerings to stay ahead of the competition and the technological curve.

Tencent Holdings Ltd ADR

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TCEHY

Current yield:

0.35%

Forward P/E:

26.25

Price

US$58.15

Just value:

$108

Value

45% off

Pit

Large

Moat trend

Stable

Star rating

***88

Data as of January 24, 2022

Tencent (TCEHY) is the world’s largest video game provider. Its stable of franchises includes the world’s highest-grossing mobile game Honor of Kings, as well as PUBG, Clash of Clans, League of Legends and Fortnite. Tencent also owns China’s largest social media app, WeChat.

Over the past decade, Tencent has capitalized on the industry’s shift towards mobile gaming with the world’s most popular titles such as Honor of Kings and PUBG Mobile. “To this day, games remain Tencent’s primary monetization model— [an estimated] more than 40% of the group’s operating revenue comes from this segment,” says a Morningstar equity report.

Although games and advertising represent the bulk of Tencent’s cash flow generation, its investments in cloud storage, business services and enterprise software also offer potential for long-term value creation. . “Given the size of the Chinese economy and the prevalence of digital adoption, there are huge opportunities ahead for enterprise technology, and Tencent will most likely become a formidable player in the space. Industrial Internet,” said Morningstar equity analyst Ivan Su. fair value of the stock at US$108. Wide-moat Tencent’s ability to profitably monetize its network through games, music, advertising, fintech and other services indicates “that the company will generate excess returns on capital over the next 20 years,” says Su.

Activision Blizzard Inc.

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ATVI

Current yield:

0.58%

Forward P/E:

20.70

Price

$79.99

Just value:

$92

Value

15% off

Pit

Narrow

Moat trend

Stable

Star Rating

***

Data as of January 24, 2022

Video game major Activision Blizzard (ATVI) is one of the largest PC video game publishers with an impressive portfolio of franchises including World of Warcraft (over $8 billion in lifetime sales) and Call of Duty (sold over 175 million copies over 12 years).

“The company is well positioned to solidify its leadership position by developing compelling new versions of its existing franchises and introducing new experiences, such as Overwatch,” a Morningstar stock report said, adding that the company would continue to benefit from the continued growth of the mobile market.

“Like its peers, the company is focused on engaging users beyond the initial sale of the game by extending the monetization window by expanding the use of multiplayer options and releasing downloadable content (DLC),” says Neil Macker, Morningstar equity analyst.

Both methods encourage players to stick with the original game longer and provide a revenue stream from the secondary market. “Activision has used DLC and multiplayer to extend the life of multi-billion dollar franchises like Call of Duty, and we believe franchises like Hearthstone and Overwatch can sustain long-term success as well,” said said Macker, who recently downgraded the stock’s fair value. value of US$97 to US$92, driven by the negative impact of allegations of sexual misconduct within the famous video game company.

Tech heavyweight Microsoft plans to acquire Activision Blizzard for $68.7 billion. However, Macker expects regulators to carefully review the deal, “given the recent anti-Big Tech fervor on both sides of the aisle in Washington.”

Interactive software Take-Two Inc

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TWO

Current yield:

Forward P/E:

25.13

Price

$158.04

Just value:

$200

Value

26% off

Pit

Narrow

Moat trend

Stable

Star Rating

****

Data as of January 24, 2022

Owner of the famous Rockstar Games and 2K labels, Take-Two (TTWO) is one of the world’s largest independent publishers of video games on consoles, PCs, smartphones and tablets. Its well-known franchises include Grand Theft Auto (345 million units sold), NBA 2K, Civilization, Borderlands, Bioshock and Xcom.

“The company is well positioned to not only capitalize on the success of Grand Theft Auto, but also to continue to diversify its revenue beyond its flagship franchise,” a Morningstar stock report said, adding that the company will continue to benefit from secular trends such as “the strong demand for consoles, the continued revitalization of PC games and the growth of mobile games”.

Take-Two capitalized on the shift within the industry towards a two-tier market comprising major AAA blockbuster titles (at the high end of the market) and smaller indie games. The gaming giant is focused on the high end, using its capital to fund big-budget blockbusters. Its biggest annual franchise, NBA 2K, is the most popular sports game in the United States and China.

“We expect the company to continue to invest in new intellectual properties and fund its development through sequels and expand its core franchises into mobile platforms,” ​​says Macker, who sets the fair value of the share at 200 USD.

In a major move into the mobile games market, Take-Two recently announced plans to buy mobile game publisher Zynga in a $12.7 billion deal. “We expect the deal to close, but the closing could happen in the second half,” Macker said.