Video games’ appeal will last beyond lockdown – here's how to profit

Being cooped up at home has made us far more inclined to play computer games. But this isn’t just a blip. The sector has embarked on a long-term upswing, says Stephen Connolly.

After the big hit to stockmarkets from Covid-19, investors are hunting for bargains. The obvious place to look is among companies that have had the biggest share price falls. But is this necessarily the best place? In the immediate wreckage of a market collapse, when selling can be at its most indiscriminate, there will be good companies that become cheap. 

But there will also be companies that remain overvalued despite their lower prices; others so badly buffeted by events that experts can’t even work out a fair price; and several that simply aren’t worth buying at any price. Getting it right requires not just skill, judgement and luck, but also confidence in one’s convictions – which is hard to maintain when surrounded by sellers. There will be winners and losers.

A different approach to finding bargains

Another area to search for bargains, away from that minefield, is among stocks going up. This sounds counterintuitive but makes sense. Investors buying stocks that are rising when markets overall are collapsing, and who keep on buying to send them even higher, must surely have very strong confidence in the future. 

And it takes a lot more than a couple of eccentric buyers on the edges of the market to push stock prices up convincingly in the face of fear and volatility, so investors should be taking note. One small sector of the market that stands out in this context is videogaming. While the US S&P 500 and the UK FTSE All Share have lost a respective 9% and 22% this year, video game stocks have gained 11%. 

That people forced into lockdown are taking up videogaming to pass the time can’t be much of a surprise. Market researchers at NPD Group estimate that spending on games and related devices jumped by 35% year-on-year to $1.6bn in the US in March. The top lockdown games have attracted millions of existing and new players. They include the latest number one sensation Animal Crossing: New Horizons from Nintendo, while established titles such as Fortnite, produced by Epic Games, Activision Blizzard’s Call of Duty and Sony’s baseball game MLB The Show 20 have also performed strongly.

The hardware cycle

But it’s not just the games, it’s what you play them on. And while this can still include desktop computers, dedicated games consoles endure. The earliest versions were produced in the 1970s, when Atari was the key brand; it was eventually eclipsed by the likes of Sony and Sega. 

The consoles lead a so-called “hardware cycle” in the industry, whereby manufacturers such as Nintendo, Sony and Microsoft upgrade or release new console models and thus lift the technical specifications the system can cope with, allowing publishers to take their games to higher levels of wizardry. But the great democratisation of gaming comes through smartphones. The reality is that almost everyone, whether they know it or not, has a console on them and is a potential game player and buyer.

The games and the hardware are both in demand. Even early in the lockdown phase, online gaming platform Steam surpassed 20 million concurrent users for the first time, while retailers have been selling out of consoles fast across the board. Nintendo’s Switch console, for example, which supports Animal Crossing, has been breaking sales records, shifting 21 million units in the first quarter. The game itself sold 13.4 million copies in the few weeks from its March launch – handily timed for lockdowns – until the end of the first quarter alone.

Not just a lockdown blip

These are big numbers but we know the lockdown will be eased and people will be going back to school and work eventually. Investors must satisfy themselves that the strong performance of the sector is more than just a short-term response to being kept indoors. And the good news is that the longer-term outlook for the industry is auspicious. 

There is plenty to suggest that lockdown has simply accelerated the integration of videogaming into our lives. It’s a fundamental shift, much more than a blip from bored people playing games and then forgetting all about them once the office re-opens (a phenomenon that will play out in various ways across other areas of post-lockdown technology such as remote working and teleconferencing). Growth should, therefore, remain brisk and, arguably, the sector should be rated more highly by investors.

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Stephen Connolly writes on finance and business, and has worked in investment banking and asset management for over 25 years (sc@plainmoney.co.uk)

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