3 Gamer Stocks I’m Buying September 2021

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Gaming stocks are expected to rise massively and here are three of my biggest bets for the gaming market.

Hey Bow Tie Nation, Joseph Hogue here with our monthly update to the 2021 stock portfolio and three stocks I’m adding for September. And Nation, this month, I’m taking advantage of one of the biggest selloffs in the market last month to load up on what could be one of the best investing themes for the rest of the decade.

Now to be honest, old fart that I am, I’ve been skeptical about gaming since laying down the controller on Final Fantasy IV back in 1991. Now they’re up to like Final Fantasy 99, Ryu goes on Social Security, and I’m just like…what a waste.

But games have become so much more than just getting blisters on your thumbs, it’s grown into a social media phenomenon. A survey by Accenture found more than 80% of gamers prioritized connecting with others and meeting new people. Turns out, only 44% used video games to vent and trash talk.

I’m looking at you NewbTroll69!

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Gaming has seen explosive growth over the last decade, even before the pandemic, and could be about to enter a new era of monetization for game makers.

The U.S. gamer population alone grew 5.7% last year and while that’s expected to slow, it still represents over 150 million people with 26 million in the faster-growing esports segment. Internationally, the industry has added more than half a billion new gamers over the last three years and Accenture forecasts another 400 million will join by the end of 2023.

So the numbers are there but monetization is underdeveloped. ARK estimates the cost-per-hour for gaming monetization is under $0.35…that’s less than the rate on social media platforms, online music and less than a third the rate for traditional cable and media. In fact, as the gaming industry develops, ARK is forecasting that monetization rate to grow by 20% annually over the next five years.

ARK Foresees Massive Revenue Growth in Gaming Stocks

ARK estimates just in-game revenue could jump from $130 billion to as much as $350 billion by 2025 with even the more moderate base-case seeing 12% annual growth.

gamer stocks / gaming stocks to buy in September 2021

Gaming stocks have taken a huge hit over the past month on fears that an end to the lockdowns would mean lower revenue and growth as gamers come out from their mom’s basement…but we all know that’s not going to happen. Gamers are gonna game for that social interaction and the increase in monetization for the industry will continue to drive revenue.

I’m going to focus on the developers with our three September stock picks but I wanted to share this chart by Accenture showing direct and indirect revenue streams to the industry as a great place to start when looking for gaming stocks. The firm estimates $200 billion in direct revenue through in-game ads, hardware and software sales and an additional $100 billion indirect revenue through mobile devices, eSports, content and accessories.

I’ll be adding these three gaming stocks to our 2021 Bow Tie Nation portfolio on Stockcard. The portfolio is up 24% so far and beating the market by 10% which is down from the 35% return we had in March but I’m still more or less happy with it.

A lot of those returns have come from energy stocks and financials, we’ve booked better than 40% on four stocks including Wells Fargo, Lyft, Devon Energy and Diamondback…but I want to diversify the investments a little more get a little more exposure into growth segments like gaming for our September stocks.

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Gamer Stocks I'm Buying This September 2021

Our first gaming stock addition, Take-Two Interactive, ticker TTWO, probably has the strongest titles in the industry with Grand Theft Auto, NBA 2K and Red Dead Redemptions.

And something we’ll see in all three stocks, and really across the entire gaming space, is all these sold off hard on earnings this month. Take-Two was down 10% on its second-quarter release but I think it puts these in value territory for that long-term story.

The company reported earnings of $1.30 a share which was up 69% from the same quarter last year but sales fell by 2% to $813 million. Here you can see that the three-year growth of 23% annually was stellar but older games accounted for 92% of net bookings for the quarter, it just hasn’t launched anything new lately and that’s what’s limiting the top-line growth.

Take Two released a free update to the GTA franchise in the quarter but will release a standalone version in November which could be a good boost to sales and sentiment. The company’s also releasing its top-selling NBA 2K franchise in September and the recent acquisition of mobile developer Nordeus strengthens the mobile portfolio and brings in its first soccer offering.

Take Two has the best cash position of the three stocks I’m adding in September with $2.54 billion in cash against just $188 million in debt. That means it has more than $2.3 billion or about 12% of the market cap just in cash which I expect it will mostly spend on acquisitions to recharge that growth.

Analysts have an average target price of $214 per share, about 32% higher from here and those upcoming launches could help it get back there.

eSports leader Electronic Arts, ticker EA, is one of the largest gaming companies and the largest on our list at $40 billion market cap.

Shares fell about 6% after the earnings announcement this month but have since regained most of that. Sales were up 6.3% in the first quarter of its fiscal 2022 year, which is a little slower compared to Take Two but I think the selling is overdone and EA has a really strong long-term upside.

Revenue was up last quarter on strong launches for Mass Effect and It Takes Two and the company has some solid titles coming for the rest of the year. It launches Madden 22 this month, followed by FIFA 22 and Battlefield 2042 in October. It’s been three years since a Battlefield refresh with over 210 million views on the trailer since the June announcement.

Where I really like EA though is its dominance in esports with over 140 million players on its sports titles alone over the past year. After maybe casino games, I think esports is where we see the strongest monetization over the next few years and EA is set to take advantage of that.

Despite weakness in earnings because of higher operating costs, the company repurchased 2.3 million shares last quarter and 7.2 million over the past year, about 2.5% of the shares outstanding. That combined with the dividend payment speaks to management’s confidence in cash flow going forward.

The company ended the quarter with $3.7 billion in cash against just $2.2 billion in debt, so this is another cash positive company, and should have no trouble funding acquisitions and more share repurchases.

Management expects full year revenue of $6.85 billion, so shares trade right around the industry average of 5.85-times sales. Analysts have an average target of $169 per share, just slightly above the current price so maybe not so much a value play but I like the long-term picture here.

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Shares of mobile-games leader Zynga, ticker ZNGA, plunged 18% earlier this month but are firmly in value territory.

The company reported second quarter sales that beat expectations by 5.9% to $720 million and posted an unexpected profit but came up short on expectations for user growth, even though daily active users were up 87% to 41 million and monthly active users nearly tripled to 205 million against last year’s quarter.

Zynga is leading the shift to mobile gaming with 97% of its revenue from smartphones. It’s focusing on upcoming launches of FarmVille 3 and Star Wars later this year as well as an acquisition strategy that’s driving growth. The company is set to add more than 700 million monthly users from its Chartboost acquisition alone along with Rollic which broadens its exposure into the hyper-casual gaming market.

Cash on hand rose over the quarter to $1.5 billion, just covering its $1.47 billion in debt, so it’s a in a debt neutral position even with that heavy acquisition strategy. That’s a good sign as it adds to that growth without getting weighed down too much with debt.

After the selloff, shares are trading for just 3.5-times sales which is by far the lowest in the group with an average around 5.9-times sales in the industry. Management expects to post $2.73 billion in full year sales which would be growth of 38% and the average analyst target of $12.08 a share is 47% higher from here.

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