Updated on May 3rd, 2022 by Harvi Sadhra
This is a guest contribution by Harvi Sadhra of Hashtag Investing. Hashtag investing is an exclusive community for active investors to get real-time feedback and discover compelling stocks and strategies any time.
The video game industry has seen a rough 2022. During the pandemic, gaming stocks soared but as lockdowns came to an end and people went back to their pre-pandemic lives, these stocks got a rude awakening. A lot of them are beaten down now. And that makes it a great opportunity to invest into some really good companies available at bargain prices.
The video game industry is expected to grow to $125.65 billion by 2025, according to a report by Technavio. Here are some stocks that are likely to ride the boom:
Top Gaming Stock #1: Nvidia: Semiconductor company Nvidia’s stock has fallen over 35% in 2022 so far. Back in November, when it was scaling new heights every trading session, it started to get parodied as a meme stock. Now, it looks ripe for a buy. The company’s graphics processing units (GPUs) are highly-sought after in the gaming world. Over half the company’s revenues comes from its gaming segment where its GeForce RTX series is a superstar. Its cloud-based gaming platform, the Nvidia GeForce Now, is also steadily gaining traction.
The company’s gaming revenue for Q4 2021 came in at a record $3.42 billion out of a total $7.64 billion, up 37% from Q4 2020. For Q1 2022, the company has said it estimates revenue at $8.1 billion (+/- 2%). Analysts are bullish on the stock and have given it an average price target of $329, a potential upside of over 68%. The stock has to be right up there when it comes to gaming investments.
Top Gaming Stock #2: Electronic Arts: When the company announced its Q3 earnings numbers in February 2022, CFO Blake Jorgensen said, “Our portfolio approach will enable us to deliver organic growth in the double digits this year, continue to deliver strong cash flow, and provide a strong foundation for growth as we look to the future.”
This is a welcome change for gaming investors as the company has underperformed in the past few years. Its revenues have grown only 10% from 2018-2021. The stock has fallen a little over 9% in 2022. Electronic Arts was the forefront of the online gaming space. It has seen multiple economic cycles. While worries over the decline in video game purchases have been growing, EA will likely be a company that will be able to weather the storm and come out stronger. The average analyst price for EA stock is $161.82 which is a potential upside of almost 35% from current levels.
Top Gaming Stock #3: Unity Software: Unity has lost over 50% of its value in 2022. Naysayers will say that its metaverse play is not working. We would say the exact opposite: This is the perfect time to buy into Unity. Unity said in 2021 that 50% of all mobile, PC and console games us its software. If this is not a multi-billion-dollar opportunity, we don’t know what is.
The company recently acquired two small visual effects businesses, Ziva Dynamics and Weta Digital. Both these companies are known for their graphic capabilities. This is likely to ensure that developers will stick with Unity. It’s no wonder that the average analyst target price for this stock is $139.52, a potential upside of over 103%.
While gaming will likely continue to be the bedrock of Unity’s business, the company is looking beyond. Unity is building up a solid name for itself in the virtual reality and augmented reality space. It is leveraging its gaming know-how into the fields of simulation and robotics. The company is building new revenue sources even as it continues to strengthen its gaming presence.
Top Gaming Stock #4: Roblox: This is a stock you should buy only if you buy into the idea of the metaverse. And you should buy into the metaverse. That universe is just opening up and has the potential to grow into the next big thing in technology. Roblox was one of the first-movers in this space. Its stock soared in 2021 when people were locked down but has since taken a beating on the bourses, falling almost 67%.
The company’s topline numbers for Q4 2021 are very good. Revenue increased 83% to $568.8 million compared to Q4 2020. Average Daily Active Users (DAUs) were 49.5 million, an increase of 33% year-over-year. Hours Engaged were 10.8 billion, an increase of 28% year over year. These metrics are not easy to come by. While the pace of additions will likely slow in 2022, the company is confident that it will keep increasing. The average analyst price for the stock is $61.82 which is a potential upside of 89% from current levels.
Top Gaming Stock #5: Activision Blizzard: Warren Buffett’s Berkshire Hathaway owned 1.87% of Activision Blizzard at the end of 2021. On April 30, at his annual meeting in Omaha, Nebraska, Buffett said that Berkshire now owns 9.5% of the company’s stock. The sudden buying is a merger arbitrage bet as Microsoft continues to pursue the Activision acquisition.
On April 27, Activision shareholders said yes to the $69 billion that Microsoft offered for the company. But there is a chance that US antitrust laws could derail the merger.
Microsoft believes that Activision is severely undervalued and has made an offer of $95 per share. The stock closed May 2 at $78.06. An upside of 21% is there for the taking. Buffett said, “Occasionally I’ll see an arbitrage deal and do it. If the deal goes through, we make some money.” Do you want to miss it?
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