Four Video Game Stocks to Buy Amid High Inflation, War and Recession

Paul Dykewicz

Four video game stocks to buy despite high inflation, war and risk of recession offer investors ways to pursue potent potential profits.

The four video game stocks to buy have unique characteristics and advantages that should allow them to prosper even though demand is expected to drop industry wide. With the Fed already having raised interest rates 0.75% in June, July and mid-September in an attempt to rein in a rise in the Consumer Price Index of 8.3% during the last 12 months, BofA Global Research is forecasting a 2023 recession scenario of video game sales falling 4-6%.

BofA Global Research wrote in a recent research note that it prefers personal computer (PC) and console video game exposure than mobile-oriented investments. Key advantages for the favored PC category in a recession stem from monetization of hardcore games, primary entertainment, immersive and social game playing, while facing lower user acquisition risks than mobile competitors, BofA wrote.

Four Video Game Stocks to Buy Aided by Loyal Users

“Interactive entertainment, including video games, are inexpensive and a form of entertainment that consumers are likely to continue using in a declining economy as they reduce spending in other areas,” said Bob Carlson, a pension fund chairman who also leads the Retirement Watch investment newsletter. “But not all video game companies will do well. The company must continue offering innovative, new and compelling content that engages players.”

Bob Carlson, head of the Retirement Watch newsletter, meets with Paul Dykewicz.

Electronic Arts (NASDAQ: EA), a video game company headquartered in Redwood City, California, is a good choice for investors because more than half of its revenue comes from sport-related games, Carlson counseled. The company has a strong customer base, and its revenues and earnings likely will be consistent regardless of what is happening in the economy, he added.

The company also is the “top pick” in a recession among video game stocks covered by BofA Global Research. The investment firm set a price objective on the stock of Electronic Arts at $155 a share and described the company’s franchises as the “consumer staples” of the video game industry due to their hardcore gamer communities and dominant brands.

The top titles offered by Electronic Arts include FIFA, Apex Legends, Madden NFL, F1, PGA Tour, Battlefield Mobile and others that should be resistant to a recession as gamers are more likely to pull back on obscure, new-to-market titles than their longtime favorites, BofA wrote. Mix shift into Live Services (estimated at 75% of fiscal year 2024 sales) and lower exposure to Casual mobile (11% of fiscal year 2024 sales) also strengthen the case for the company as BofA’s top pick among video game stocks in a recession.

Chart Courtesy of www.stockcharts.com

Value investors may like that Electronic Arts currently trades below BofA’s index of 18 PC/Console game publishers on a price-to-earnings (P/E) basis. Risks to the stock include a loss of key personnel, deterioration of gamer budgets in a return-to-work environment, rising personnel costs that are not offset by price increases and production delays, wrote Omar Dessouky, CFA, BofA’s video game research analyst.

Skousen has Recommended EA Profitably in the Past

Mark Skousen, leader of the Forecasts & Strategies investment newsletter, recommended Electronic Arts profitably during 2021 in his TNT Trader service. He also turned a profit in video game company Zynga in 2020 for subscribers of his monthly newsletter.

Skousen currently is not invested in any video game stops but part of the reason is due to the continued Fed interest rate hikes that are slowing the economy. Plus, the money supply has shrunk from growth of 40% in 2020-21 to under 6% in 2022.

Mark Skousen, a descendant of Ben Franklin, meets with Paul Dykewicz.

AppLovin Leaps into Four Video Game Stocks to Buy

Another of the four video game stocks to buy is AppLovin (NASDAQ: APP), a mobile technology company in Palo Alto, California. BofA Global Research gave AppLovin a $43 a share price objective, with the company’s software segment assigned a value of $41 a share and its gaming segment, including both in-game advertising and in-game consumer spending, equaling $2 a share.

The stock’s chance to outperform expectations would be aided by a new dovish U.S. central bank monetary policy and regulation that would reduce Apple’s (NASDAQ: AAPL) or Google’s (NASDAQ: GOOGL) control over their own mobile ecosystems, BofA wrote. Risks to attaining BofA’s projected price objective for APP include a recession and a tightening of financial conditions brought about by the Fed.

The investment firm also wrote that mobile platform policies of Google and Apple would debase broker ad networks’ value proposition. Plus, a “major resurgence” of Facebook, owned by Meta Platforms Inc. (NASDAQ: META) on iOS would also negatively affect AppLovin’s stock, BofA wrote.

Chart Courtesy of www.stockcharts.com

Why AppLovin Appears Among Four Video Game Stocks to Buy

“Although mobile gaming is our least favorite video game vertical in a recession, we view Mobile Ad Networks as relatively advantaged in the overall mobile ecosystem due to their superior market position and pricing power, BoA wrote. “In the case of AppLovin, we see a few mitigants that could lessen the impact of a recession.”

Those reasons include:

  • Some pricing power could offset declines in ad volumes
  • Spread-taking business model and enterprise-driven spending
  • Ramp-up of new business lines and rationalization of casual gaming business could counter recession-induced revenue declines

The Mobile Ad Network industry has consolidated to roughly 13 channels, resulting in stronger pricing power among ad networks over app marketers because of lower intensity of competition, according to BofA. Moreover, as advertisers do not have direct visibility into ad inventories and the target end users, the pricing of traffic is rather “opaque” in mobile advertising, leaving room for ad networks to somewhat manage their profit margins, BofA added.

Robolox Rates Among Four Video Game Stocks to Buy

Robolox (NASDAQ: RBLX), a video game developer in San Mateo, California, received a buy rating and a $54 price objective from BofA Global Research. The company is poised to benefit from secular growth catalysts that should counter a recession, the investment firm wrote.

The company offers innovative technology, such as real-time facial animation, and new business lines that feature immersive advertising. The spending habits of its core U.S. and Canadian customers in the age 9-12 cohort should show resilience in an economic downturn, if past recession-period data provides any guide, BofA wrote.

Robolox’s increasingly important social function, similar to META and TikTok, also differentiates it from video games and makes it compelling for some players, BofA reported. Risks to achieve BofA’s price target may arise from not developing high production value content to appeal to a broader demographic, and an inability to continually improve the developer value proposition and stagnating the developer base.

Chart Courtesy of www.stockcharts.com

Catering to Kids Pays for One of the Four Video Game Stocks to Buy

Robolox’s platform over indexes on younger users, with children under the age of 13 making up roughly 50% of its daily active users. The company’s skew toward younger players could make it more recession-resistant for several key reasons, BofA wrote.

First, younger gamers are on average more devoted and spend much more time playing games than their adult counterparts. Second, entertainment spending for children tends to outperform other discretionary categories in a recession. Research by Newzoo found that Gen Z and Millennial gamers spend an average of about seven hours a week playing video games, 50% more than Gen X and almost triple the play time of Baby Boomers. Third, parents are more willing to pull back on spending for themselves rather than their children.

Expect younger video gamers to be more likely to prioritize their hobby over other leisure activities when their budget falls, BofA wrote. With doting parents preferring to sacrifice personal pleasures to spare their kids, children’s entertainment spending should not fall significantly in a recession.

Euromonitor found a secular trend of substitution of traditional toys by video games, as average gaming spent per household grew from $31 in 2007 to $81 in 2021, while household toy spending stayed largely flat. As video games increasingly have become the primary means of entertainment for Gen Z and Gen Alpha, BofA wrote that spending on such entertainment among RBLX’s core US/CAN 9-12 cohort should remain relatively resilient in a recession, if history is a guide.

Take-Two Seizes Spot With Four Video Game Stocks to Buy

Take-Two Interactive Software Inc. (NASDAQ: TTWO) is a New York-based video game holding company that earned a $130 price objective from BoA. The company boasts “world-renown titles” such as Grand Theft Auto, NBA 2K and Red Dead Redemption.

In addition, Take-Two Interactive’s PC/console franchise is among the best in the industry, BofA wrote in a recent research note. Yet, underperformance of the mobile segment could lead to downside surprises in a recession, with the success of Zynga integration an added unknown. A largely undisclosed slate ramped into a 2023 recession and a potential delay in GTA VI release contribute to an uncertain outlook that caused the investment firm to rank it neutral.

However, investors willing to take the long view may like potential catalysts for the stock. They include an announcement about Grand Theft Auto VI sooner than later, a potential acquisition by a strategic buyer and better-than-expected performance of mobile games acquired through its Zynga transaction. But risks include a severe recession causing reduced consumer expenditures on TTWO’s games, delays in game development of a major title, such as GTA 6, and continued underperformance of mobile games.

Chart Courtesy of www.stockcharts.com

Connell Calls Take-Two Interactive a ‘Forward-looking Pick’

For investors willing to speculate on Take-Two Interactive with its share price down, it could turn produce a reasonable return, if given time, due to its roughly two dozen significant games in development that are scheduled for release between now and fiscal 2025, Carlson said. A few “big hits” in the group or a number of solid products could produce a “boost” to the company’s revenue and earnings, he added.

Another fan of Take-Two Interactive at its reduced current valuation is Michelle Connell, of Dallas-based Portia Capital Management, who called it a “a forward-looking pick.”

Michelle Connell, CEO, Dallas-based Portia Capital Management

Take-Two Interactive’s share price has been “weak” since the company announced plans in January to buy Zyngna in a $13 billion acquisition of a mobile gaming leader, Connell said. The stock is down about 38% so far this year, compared to close to 30% for NASDAQ.

“Potential cost synergies from the acquisition are estimated to be $100 million,” Connell counseled. But the savings still need to be realized.

The video game sector is frequently viewed as a defensive investment play during recessions or periods of economic uncertainty. Connell continued. A $60 investment for a video game can go a long way in providing entertainment over many days, she added.

Concerns about the stock grew when the company missed revenue estimates during the past quarter but there is much to look forward to in the future, Connell opined. Since June 30, 2022, TTWO has had its 12-month sales estimates increased the most of any company within the S&P 500 — a boost of 66%, she added.

Its 12-month earnings per share estimates have risen 10%, Connell continued. The stock’s average price estimate is $160, up 50% from current levels, she added.

Canada Plans to Remove COVID-19 Entry Restrictions

COVID-19 cases and deaths affect supply and demand for video game products. Smart investors monitor COVID-19 outbreaks and lockdowns that can cause supply chain problems.

Canada announced on Sept. 26 that it would remove all remaining Covid-19 entry restrictions, such as testing, quarantine and isolation requirements. That could improve trade and tourism between that country and the United States, among others.

Resistance to China’s strict zero-tolerance COVID policy surfaced this week as a rare protest occurred in its technology hub of Shenzhen, social media video showed. The dissent came after government officials ordered a sudden lockdown due to 10 new infections on Sept. 27 in the city of more than 18 million people. Nonetheless, officials told residents in three districts there to stay home.

China has locked down more than 70 cities fully or partially to preserve its zero-tolerance policy of COVID. The danger not only is COVID, but 27 people were killed and 20 more were injured when a quarantine bus overturned on a mountain road Sunday night, Sept. 20.

U.S. COVID-19 deaths appear on the verge of falling short of totaling 3,000 for the first time in the past nine weeks with the latest count at 1,056,789, as of Sept. 27, according to Johns Hopkins University. Cases in the United States climbed to 96,116,204. America remains the nation with the most COVID-19 deaths and cases.

Worldwide COVID-19 deaths in the last week slid to less than 9,000, down from 11,000 or more in the prior two months. The number of deaths totaled 6,538,312, as of Sept. 27, according to Johns Hopkins. Global COVID-19 cases reached 615,555,422.

Roughly 79.5% of the U.S. population, or 263,812,108, have received at least one dose of a COVID-19 vaccine, as of Sept. 27, the CDC reported. Fully vaccinated people total 224,980,931, or 67.8%, of the U.S. population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 109.6 million people.

The four video game stocks to buy appear eye-catching amid the market’s pullback. Despite high inflation, Russia’s continuing war in Ukraine and recession risk after 0.75% rate hikes by the Fed in June, July and Sept. 21, the four video game stocks to buy could show resilience with loyal customers during tough times.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for multiple-book pricing.

 

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