1 Gaming Stock To Buy And 1 To Avoid

We delve into one company to buy and one to avoid in an attempt to steer clear of pitfalls and to capitalize on a growing gaming trend.

Jan. 21, 2022

The global gaming market continues to evolve and expand and is estimated to reach $545.98 billion by 2028. Companies operating in this space are forced to adapt or risk being left behind, and we look at one company to buy and one to avoid. 

Take-Two Interactive

Take-Two Interactive (NASDAQ: TTWO) is an American video game company well-known for its hit franchises such as ‘Grand Theft Auto’ (GTA), ‘NBA 2K, and more.

Take-Two has evolved from a company that was reliant on hit releases, to now generating roughly two-thirds of its $858.2 million in revenue from recurrent consumer spending. The majority of revenue is also digitally delivered, which will be increasingly important going forward. Take-Two also reported a net income of $10.3 million in Q2 and raised guidance. While older releases such as ‘GTA’ and ‘Red Dead’ continue to drive user engagement, CEO Strauss Zelnick also stated that the company has the “strongest multiyear pipeline in our company’s history”. 

This acquisition of Zynga gives Take-Two a significant foothold in the mobile space, which is the fastest-growing segment in the gaming industry. On the financial side, the acquisition will also result in $100 million of annual cost synergies in the first two years after closing. Beyond Zynga’s games such as Farmville, the combination of its expertise with Take-Two Interactives intellectual property is a fascinating area for growth. 

However, there is intense competition in the gaming space from the likes of Microsoft, which acquired Activision Blizzard and many other players. Take-Two’s acquisition of Zynga is promising but also brings with it an execution risk that investors should be mindful of. 

GameStop: Bull vs Bear arguments

GameStop (NYSE: GME) is the world’s largest retailer of video games and was one of the meme-stocks caught up in Reddit fuelled hype in 2021.

GameStop’s business fundamentally revolved around selling consoles and video games, but under its new management is shifting increasingly to digital. Sales increased in Q3 2021 to roughly $1.29 billion compared to $1 billion the year prior. The company also took advantage of its soaring stock price in 2021 and now has no debt and a cash pile of $1.4 billion. 

As part of its turnaround strategy, GameStop has also made inroads into non-fungible tokens (NFTs) and blockchain as it plans to develop games that use blockchain and NFT technology. It is also reportedly aiming to establish an NFT marketplace that will launch later this year, selling avatars and other items. 

The company continues to lose money with an expanding net loss of $105.4 million in Q3. Sales of hardware and accessories fuelled growth while software sales declined. Given GameStop’s digital turnaround strategy, this is a serious concern. On top of all this, the company will also have to contend with global supply chain issues. 

Other companies such as Sony, Epic Games, Microsoft, and more are also allowing users to download games directly to their consoles which means that GameStop loses out on sales. This is likely to be the way forward in the coming years and poses a significant problem.