The video game industry is a very big business, with entire ecosystems built around publishing and community. Now the sector is consolidating, and this is how investors can play along, asserts Jon Markman, growth stock expert and editor of Strategic Advantage.
Microsoft (MSFT) recently announced the company is buying ZeniMax Media. The $7.5 billion purchase brings the number of in-house studios to 24. The $7.5 billion purchase brings the number of in-house studios to 24.
It also takes control of some of the industry’s most popular franchises. Investors should consider buying Take-Two Interactive (TTWO) at some point in the next few months in response.
In a world shrunk by trade wars and politics, video gaming is immersive, escapist, and unapologetically global. For example, game culture is so big in China, children began to develop myopia.
The ministry of education, in 2018, went to far as to enforce strict guidelines to prevent kids from hopping on their smartphones to play games after school.
According to a Bloomberg report, state officials said children should spend 30-40 minutes using electronic products geared toward learning, followed by a 10 minute break for gaming.
Apparently, staring wide-eyed at a device for learning purposes does not cause nearsightedness. The bigger picture is Chinese companies see a huge global opportunity in gaming.
Tencent Holdings, the parent company of WeChat, a Chinese social media behemoth, has built a thriving gaming portfolio. The Shenzhen company, among other notable investments, has large stakes in Epic Games, Riot Games, Supercell and Activision Blizzard (ATVI).
That means the company has an interest in the mega game franchises Fortnite, League of Legends, Clash of Clans and Call of Duty. And Variety noted in June that Tencent accounts for $15 billion in global video game revenue, by far the biggest player in the sector.
Meanwhile big American tech companies have been busy building their own gaming portfolios.
Amazon (AMZN), in 2015, got into a bidding war with YouTube for the rights to Twitch, a wildly popular online streaming site. The online retail giant eventually paid $970 million for a website where people congregate to watch others play video games.
Three years later Twitch had more viewers than CNN. The New York Times reported in April that Amazon is pouring hundreds of millions into a new game studio called Relentless.
According to research from Newzoo, the global games market is expecting to reach $160 billion in 2020, up 7.3% versus a year ago. For comparison, gaming is 8x the size of the worldwide recorded music industry, and almost 4x larger than global box office receipts in a good year.
The Microsoft purchase of ZeniMax brings the game studios Bethesda Softworks and id Software under the Xbox team. Together the companies are responsible for the Fallout, Elder Scrolls, Doom, Rage and Wolfenstein game franchises.
The deal also reveals the underlying motivation. Big companies are looking for assets that bring together content, community and the cloud. The press release makes this clear: In the future, games will be available on mobile, console and other formats like virtual reality. They will live in the cloud and be available completely on demand, anytime, anywhere and on any screen.
The question is what acquisition targets meet those prerequisites, given the breadth of the current Tencent portfolio dominance? The number of prospective firms is few.
The case for Take Two Interactive isn’t only about its value as a takeover target. The company is an industry innovator with legions of built-in fans around its Grand Theft Auto, NBA 2K and Red Dead Redemption franchises.
Red Dead, a western themed action adventure game, made its debut in 2004 for Xbox and Sony PlayStation. The Redemption variant, released in 2010, has been a critical and commercial juggernaut.
And Redemption 2, released two years later, generated $725 million in sales during the three days following its release. Grand Theft Auto, the flagship franchise, has sold 135 million units since its 2013 launch.
At a recent investors conference, Strauss Zelnick, chief executive officer, said the company has been boringly consistent because its titles spark rampant fandom. He’s being modest. Sales since 2016 have jumped from $1.4 billion to $3 billion in fiscal 2020.
The company has also shown consistent profits. Earnings surged to $404 million in 2020, up 21.5% year-over-year. The game sector is consolidating and impactful studios are becoming more scarce. Buy Take-Two on this pullback.
