Top 3 Gaming Stocks to Watch in 2019

Top 3 Gaming Stocks
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Best Gaming Stocks of 2019

The video game industry has evolved a lot since Pong was released in November 1972. No longer just an after-hours fad for kids hunkered down in an arcade, the video game is a financial juggernaut.

Video gaming stocks have garnered a lot of attention as investors look to cash in on this lucrative segment. With the stock market off to a strong start, many investors are wondering what the best gaming stocks of 2019 will be. Read on to find out.

Gaming Revenue Soaring

Did anyone predict that the video game industry would be as big as it is today?

From the so-called cast-offs playing video games in dank corners of arcades in the mid-1970s to today, when more than 80 American colleges offer e-sports scholarships, the electronic gaming industry has morphed into a multi-billion-dollar global phenomenon.

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Thanks to mobile phones, you can play video games on the go.

In 2018, the 2.3 billion gamers from around the world were forecast to help the gaming market grow to $137.9 billion. Of that total, mobile games were expected to capture 51% ($70.3 billion). (Source: “Newzoo: Games market expected to hit $180.1 billion in revenues in 2021,” VentureBeat, April 30, 2018.)

This is the first time that more than half of all gaming revenue will come from the mobile segment; 80% came from smartphones and 20% from tablets. By 2021, the global video game industry is predicted to be worth $180.1 billion. Of that total, about 59% ($106.4 billion) will come from mobile games.

Despite the rise of mobile gaming, sales from console or PC gaming remain strong. In 2018, console gaming was the second-largest revenue-generating segment at $34.6 billion. Sales from PC games were expected to bring in $32.9 billion.

Should the 2021 forecast of $180.0 billion hold true, that would represent a four-year (2017–2021) compound annual growth rate (CAGR) of 10.3%. The 10-year CAGR is even more impressive.

In 2012, global games revenue was just $70.6 billion, putting the gaming market’s 10-year CAGR rate at 11%. There aren’t many companies or industries that can lay claim to a 10-year CAGR in the double digits.

Best Gaming Stocks 2019 List

Here are three of the top gaming stocks to watch out for in 2019.

Company Stock Ticker
Tencent Holdings Ltd OTCMKTS:TCEHY, HKG:0700
Activision Blizzard, Inc. NASDAQ:ATVI
Zynga Inc NASDAQ:ZNGA

Tencent Stock Forecast

Tencent Holdings Ltd (OTCMKTS:TCEHY, HKG:0700) is the biggest gaming company in the world.

It might be best known as the company that owns “WeChat,” a messaging, social media, and mobile payment app (with more than one billion monthly users), but it also brings in billions in revenue from video games like Arena of Valor, League of Legends, PlayerUnknown’s Battlegrounds, and Fortnite.

With more than 200 million players, Fortnite is one of the gaming industry’s biggest winners. Back in 2012, Tencent purchased a 40% stake in Epic Games, Inc. ($330.0 million). At the time, Fortnite was still in the development stage.

Thanks to the cash infusion, Epic dropped the monthly charges for its game engine and gave it away for free to anyone who wanted to use it. Gamers like playing for free. Between its July 2017 release and May 2018, Fortnite is thought (Epic is a private company) to have generated $1.2 billion in revenue.

By the end of 2018, Fortnite is thought to have netted a total of $2.0 billion. Some sources have put that number as high as $3.0 billion. (Source: “Fortnite soared to fresh heights last year, helping Epic earn a reported $3 billion in profit,” TechCrunch, December 27, 2018.)

The game may be free to play, but players make microtransactions (small payments for upgrades to their characters, etc.), which seems to be paying off.

In late 2018, China lifted its freeze on new video games, releasing 80 new titles. Oddly, none of them came from Tencent. It may have been shut out of its native China, but because of its more global approach, it continues to do well.

Tencent Holdings Ltd Reports Solid Q3 Results

On November 14, 2018, Tencent announced its financial results for the third quarter. Tencent’s revenue for the third quarter increased 24% year-over-year to $11.7 billion. (Source: “Tencent Announces 2018 Third Quarter Results,” Tencent Holdings Ltd, November 14, 2018.)

The company’s online gaming revenue grew seven percent year-over-year and 11% over the second quarter to $2.81 billion. PC gaming sales were down 15% year-over-year and four percent sequentially at $1.79 billion.

Tencent said it has 15 revenue-generating games and it released 10 new titles during the third quarter.

Net income for the period was up 30% at $3.4 billion.

Chairman and CEO Ma Huateng said the following:

During the third quarter of 2018, we registered strong operating results in our businesses and maintained healthy financial metrics…Our advertising, digital content, payment and cloud services sustained robust activity and revenue growth, and now account for the majority of our revenue.

(Source: Ibid.)

Chart courtesy of StockCharts.com

Tencent entered 2018 trading at $53.77 but came under pressure in July after the company announced that Chinese regulators stopped approving new game releases in China. The Chinese government was also not allowing companies to exploit paid-for versions of games.

These economic headwinds caused Tencent to announce earnings below estimates. In the weeks following the announcement, Tencent was forced to rethink the gaming sector and imposed its own restrictions on games usage and also cut its own games marketing budget. The broad-based market sell-off in October 2018 didn’t help either.

The company’s share price rebounded in late October and closed out the year at $40.14—a 25% increase over its lows in late October but still down 25% on the year. Tencent continues to have great momentum, though. Currently trading around $44.60 at the time of this writing, the company’s share price is up about 14% year-to-date.

Activision Stock Forecast

The world’s most successful standalone interactive entertainment company, Activision Blizzard, Inc.’s (NASDAQ:ATVI) portfolio of games includes some of the most popular in the entire entertainment industry.

Every month, roughly 500 million users in 196 countries play any number of the company’s addictive games. (Source: “About Us,” Activision Blizzard, Inc., last accessed February 1, 2019.)

Some of its biggest games are World of Warcraft, StarCraft, Diablo, Hearthstone, Heroes of the Storm, Overwatch, Call of Duty, Candy Crush Saga, Farm Heroes Saga, Pet Rescue, and Bubble Witch.

Activision recently announced a deal with Walt Disney Co (NYSE:DIS) to broadcast its Overwatch League matches live on primetime ESPN. (Source: “ESPN, Disney XD And Blizzard Entertainment Announce Multiyear Exclusive Telecast Agreement For Overwatch League,” Activision Blizzard, Inc., July 11, 2018.)

If you think e-sports aren’t a big deal, think again. 57 million people watched a recent professional video-gaming match. To put that into perspective, that’s three times more than the number of people who watched the 2018 NBA finals.

Those who love watching these events live have no problem spending more than $100.00 for a ticket.

This might explain why companies like Intel Corporation (NASDAQ:INTC), The Coca-Cola Co (NYSE:KO), and T-Mobile Us Inc (NASDAQ:TMUS) spent approximately $700.0 million sponsoring e-sports.

And it might also explain why the average salary in one U.S. professional e-sports league is an eye-watering $320,000.

In addition to games, Activision Blizzard Studios makes original films and television shows based on its library of intellectual properties.

Activision Blizzard, Inc. Reports Encouraging Q3 Results

On November 8, 2018, Activision announced that revenue for the third quarter was down 6.5% at $1.51 billion, versus $1.62 billion in the same prior-year period. (Source: “Activision Blizzard Announces Third-Quarter 2018 Financial Results,” Activision Blizzard, Inc., November 8, 2018.)

On the plus side, third-quarter Activision’s revenue beat the company’s previous guidance of $1.49 billion. Earnings per diluted share were $0.34, compared with $0.25 in the third quarter of 2017.

“Activision Blizzard’s results for Q3 exceeded our prior outlook as we continue to entertain large audiences, drive deep engagement, and attract significant audience investment across our franchises,” , said CEO Bobby Kotick. (Source: Ibid.)

Some highlights from the quarter include:

  • Major content releases from Call of Duty, World of Warcraft, and Candy Crush
  • Players spent a record 52 minutes per day in Activision, Blizzard, and King games
  • Activision Blizzard delivered $1.0 billion of in-game net bookings in the third quarter and a record $3.0 billion year-to-date
  • King had two of the top 10 highest-grossing titles in the U.S. mobile app stores for the 20th quarter in a row, with Candy Crush Saga at No. 1 again


Chart courtesy of StockCharts.com

Activision was off to a great start in 2018. From the start of January until October 1, the company’s share price advanced an impressive 34%. Over the same time period, the Nasdaq was up 15.8% and the S&P 500 advanced roughly nine percent.

Then the October meltdown occurred, and Activision, like the broader market, took a huge tumble.

In November, Activision’s share price took another hit after announcing a weaker-than-expected outlook for the fourth quarter, including revenue of $2.2 billion and non-generally accepted accounting principles (GAAP) earnings of $0.64.

These headwinds were exacerbated by the December sell-off. Frankly, the company’s share price hasn’t recovered. Yet.

Even after a 45% drop, Activision is still one of the best gaming stocks in 2019.

Thanks to its roster of games, hundreds of millions of players, and strong international footprint, Activision has a great long-term outlook. Not only that, but the recent sell-off has given it a much more attractive valuation.

In early October, the company was trading at more than 120-times trailing earnings and 30-times forward earnings estimates. Today, it has a trailing price-to-earnings (P/E) ratio of 60.78 and a forward P/E ratio of 17.65.

Activision is one of the world’s top gaming companies and continues to launch the industry’s most popular games. Thanks to the sell-off, its shares are trading in a much more attractive level than they were just a few months ago.

Zynga Stock Forecast

Normally, bigger is better, but Zynga Inc (NASDAQ:ZNGA), with a market cap of just $3.9 billion at the time of writing, is one of the top-performing names in the computer software gaming industry.

To date, more than a billion people have played Zynga’s games both online and through mobile. Some of it’s most popular games include FarmVille, Zynga Poker, Words With Friends, Hit it Rich! Slots, and CSR Racing.

Zynga Inc Q3 Results Came in Ahead of Guidance

On October 31, 2018, Zynga announced its financial results for the third quarter.

Zynga’s revenue for the third quarter was $233.2 million, up four percent over the $224.6 million recorded in the same prior-year period and up $15.2 million over previous guidance. (Source: “Zynga Q3 2018 Earnings Highlights,” Zynga Inc, October 31, 2018.)

During the third quarter, mobile revenue increased nine percent year-over-year while mobile bookings were up 23% year-over-year. Mobile now represents 91% of the company’s total revenue, compared to 87% a year ago.

Net income was $10.2 million, a decline of $7.9 million year-over-year but $31.2 million better than previous guidance.

In a letter to shareholders, management said the following:

This quarter we delivered a major milestone for Zynga as we surpassed our near-term margin goal. This achievement reflects the successful execution of our turnaround strategy to sharpen our operating model while enhancing our live services and investing in areas for future growth.

(Source: Ibid.)

Third-quarter highlights include:

  • Delivered Q3 results ahead of guidance across key financial measures
  • Achieved its best mobile revenue and bookings performance in history
  • Mobile user pay bookings were up 16% year-over-year
  • Generated operating cash flow of $41.1 million, up 17% year-over-year
  • Announced a multi-product licensing agreement with Disney to create a new mobile “Star Wars” game, with the option for a second new game
  • Announced a new licensing agreement with Warner Bros. Interactive Entertainment to develop and publish a new “Harry Potter” match-3 mobile game
  • Also announced a multi-product licensing agreement with HBO to produce two new mobile Game of Thrones titles

Zynga Inc Raised Fourth-Quarter Guidance

On December 20, Zynga announced that it had entered into an agreement to acquire Helsinki, Finland-based mobile game studio, Small Giant Games.

Small Giant is to be accretive to Zynga’s profitability and be a meaningful growth driver in 2019 and beyond. (Source: “Zynga Enters Into Agreement to Acquire Small Giant Games, Creator of Hit Mobile Game Franchise Empires & Puzzles,” Zynga Inc, December 20, 2018.)

Zynga will acquire 80% of Small Giant for $560.0 million, comprised of approximately $330.0 million in cash and $230.0 million of unregistered Zynga common stock. Zynga will purchase the remaining 20% of Small Giant over the next three years at valuations based on specified goals.

Since its launch 18 months ago, Small Giant’s game Empires & Puzzles has repeatedly broken into the Top 10 Grossing Games on the “Google Play Store” and “Apple App Store.” The game has been downloaded over 26 million times and expands Zynga’s international and Android audiences.

Based on the strong performance of Words With Friends, Merge Dragons!, CSR2, and Wonka’s World of Candy, Zynga raised its guidance for the fourth quarter.

  • Q4 revenue of $243.0 million, up from guidance of $235.0 million
  • Q4 net loss of $1.5 million; an improvement over previous guidance of $2.0 million
  • Non-GAAP bookings of $260.0 million, up from guidance of $250.0 million
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $33.0 million, up from prior guidance of $32.0 million

Chart courtesy of StockCharts.com

Zynga has been trending upward since early 2016. That said, 2018 was a bit of a roller coaster ride. The stock entered 2018 trading at $3.90, and by early June, it had advanced 17.1% to a 52-week high of $4.57.

In October and November, Zynga’s share price took a dive during the market-wide sell-off, essentially wiping out its annual gains. It shook off those gains in early December, though, and has been climbing higher since then.

Zynga entered 2019 trading at $3.90, and on February 1, it hit an intra-day high of $4.55—for a year-to-date gain of 16.6%. The stock has also effectively wiped out all of its 2018 losses.

Should the company provide solid numbers when it announces its fourth-quarter results after the markets close on Wednesday, February 6, look for its share price to break out higher.

Or, should fickle investors send it lower on short-term profit taking, look for Zynga’s share price to rebound and the momentum from its turnaround strategy to continue.

2019 and, particularly, 2020 look encouraging for Zynga.

In its letter to shareholders, the company said the following:

As we look to 2019, we are excited to layer in our new game pipeline onto our strong live services foundation. We expect 2019 to benefit from a partial year of bookings contribution from these new games, with 2020 realizing the full year benefit.

(Source: “Zynga Q3 2018 Earnings Highlights,” Zynga Inc, October 31, 2018.)

Analyst Take

The broader gaming industry is booming with strong mobile revenue growth. Obviously, the biggest gaming companies with the most recognizable brands will continue to attract the most gamers.

That said, there are some great niche players like Zynga that are expanding and growing their products and attracting more players. 2019 will be a great year for the video game industry.  It will also be a blockbuster year for the top gaming companies, big and small.