In 2018, many of the world’s biggest gaming companies saw their share prices rise up sharply and then plummet just as quickly. Then, a slow climb through 2019 and a brief wobble in early 2020 turned into a meteoric trend upwards for the rest of last year.
This year, things have been somewhat different. The majority of 2020’s gains have been retained, although most companies that publish video games are trending flat over the last nine months.
iGaming, on the other hand, has not stayed flat. The majority of the companies in the sector have continued to trend upwards, albeit at a slower pace than what we saw in the second half of 2020.
That’s down to a few factors. Several company-specific announcements, such as mergers, the appointments of new CEOs, and strategic deals have helped companies to look attractive to investors. The sector remains incredibly competitive, with brands scrambling fiercely for new business using tactics like offering bonuses and free spins to customers that open an account with them.
This is especially true in the US where the market is at a much earlier stage in the industry lifecycle following the legalization of sports betting in mid-2018.
While it’s easy to look at what has already happened, investors are much more interested in what they can expect from the gaming industry in the months ahead. There are three main possible outcomes, so let’s take a look at them.
The gaming industry has been subjected to the cyclical market forces of boom and bust over the years. The dot-com boom in the early 2000s and the 2008 financial crisis were both times when gaming companies saw their market capitalizations take a hard battering.
There have also been industry-specific crashes too, we saw a small correction in the second half of 2018 and into early 2019. However, the most notable of these was in 1983 when the North American Video Game crash completely wiped out many companies.
This happened in the early days of video gaming and was caused by the market being flooded with poor quality titles as developers rushed to cash in. Over the two years that the crash happened, North American video game revenues fell from a peak of $3.2 billion ($8.8 billion today) to just $100 million ($252 million today) by 1985.
This resulted in the demise of many American companies, including the manufacturers of consoles and the developers of games. It also led to the dominance of Japanese companies like Nintendo, Sega, and (eventually) Sony in the global gaming market as they were mostly insulated from the crash.
While the sharp rise in demand for games and the subsequent increase in share prices seen in 1983 has been mirrored in 2019 and 2020, the conditions that led to the rises are very different. Firstly, the recent bull market seen among gaming companies is one that’s driven by tangible revenues and profits rather than speculation. Secondly, there are also much better quality control procedures in place among the biggest developers and there are now mechanisms to provide updates and patches to fix any bugs that do get through QC.
Finally, modern titles provide revenue for their publishers for years after they’ve been released, helping to improve profits even further.
Therefore, a sharp and severe crash among gaming companies is probably only likely if the entire stock market heads in that direction too.
According to The Motley Fool, the expectation among many analysts is that the gaming market has room to grow still. In recent articles published on its website, the company has suggested several UK gaming companies for investors to consider adding to their portfolios.
This includes the developer of Planet Coaster, Frontier Developments, which saw its share price rise by 18% in August 2021, and Keyword Studios which provides development services to other companies in the industry and has a list of customers that include Microsoft, Activision Blizzard, and Electronic Arts.
Further growth does seem likely, at least over the long term. Markets like Africa are still maturing, while older demographics in already developed markets are showing more interest in the medium.
Companies are also proving that they can extract more and more cash from their games, using microtransactions, remasters of classic titles, and premium and collectors editions of new releases.
Evidence of the success of this can be seen in Take-Two Interactive. The company has reported that it takes around half of its revenue from “recurrent transactions” and its subsidiary, Rockstar Games, has caused quite the stir recently as rumors have emerged that it is planning to remaster GTA III, Vice City, and San Andreas.
Pending any major announcements, further growth in share prices will depend on how the upcoming earnings reports look. External factors like inflation data and general investor sentiment will also be major influences on the performance of gaming stocks in the coming months.
The stock markets in most countries have been treading water for much of 2021. Investors are awaiting new developments, keeping a close eye on the performance of the economy, the level of inflation, and the interventions that central banks will make.
In the absence of any major updates from individual companies or the market as a whole, investors seem to be pretty happy to sit and wait it out. An example of an update can be seen in the recent announcement from Amazon relating to its partnerships with Affirm. This saw the company add $40.8 billion to its market cap in a single day.
There is little incentive for them to sell and put their capital into any other asset class as rising inflation will eat away at cash and bond returns are pretty dire at the moment. Riskier securities like cryptocurrencies may be popular among some investors, but their volatility will put many investors off, while gold doesn’t have the compounding effect of stocks.
Until we begin to see big news updates, it’s likely that we’ll continue to see relatively flat charts among gaming companies. What happens after that, at least in the short term, is a little difficult to predict.
The stock market in general is believed to be overpriced, so we may well see a correction in the short term before returning to upwards trends for gaming companies. Predicting the timing of that, however, is going to be near impossible.