1 Gaming Stock To Invest In And 1 To Avoid

The gaming industry has seen a changing landscape in recent years. We take a look at two companies with differing fortunes in the time of COVID.

Sept. 7, 2020

The gaming industry has seen some companies near all-time highs, while others have failed to adapt and, therefore, are near all-time lows. The strength of Nintendo’s stock is a testament to its ability to adapt, and is fueled by increased sales that has undoubtedly been propelled thanks to lockdown measures. However, not all gaming companies are created equal, so here are two industry stalwarts with very differing fortunes.

Take-Two Interactive

Take-Two Interactive (NASDAQ: TTWO) is an American video game company that has helped create some of the best-selling video games of all time, including ‘Grand Theft Auto’ (GTA) and ‘NBA 2K’. The company is smaller than its competitors such as Activision Blizzard and Electronic Arts with a market cap of around $20 billion and is up over 40% year to date. 

Take-Two saw an uptick in users and sales in Q1 2020 as revenue increased by 54% to a record $831.3 million. It has created a steady recurring revenue stream rather than maintaining its historical dependence on once-off blockbuster releases. Last quarter, net bookings were $996 million, up 136% year-over-year and driven by recurring consumer spending, which accounted for 65%. Likewise, 77% of console games sales were sold digitally, demonstrating the shift to digital games and revenue.

Take-Two is also exploring other avenues such as esports and mobile gaming to fuel growth. Last month, Take-Two acquired game developer Playdots for $192 million, whose games have been downloaded over 100 million times. Take-Two plans to release 21 games for mobile specifically over the next five years in a bid to tap into this rapidly growing market. Take-Two has also hosted esports tournaments for its title ‘NBA 2K’, which had over 92,000 teams competing for a cash prize. Though not yet profitable, esports represents an exciting future growth opportunity in gaming.

The future looks bright for Take-Two with CEO Strauss Zelnick recently stating that in the next five years there is the “strongest development pipeline in its history, including sequels from our biggest franchises…”.

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GameStop (NYSE: GME) was struggling prior to the pandemic due to its weakening core business as an in-store gaming retail chain with approximately 3,500 in the U.S and 1,800 internationally. During the final six weeks of the quarter, 90% of its stores were closed. In Q1 2020, Gamestop reported a net loss of $165.7 million with $570 million in cash and $1.3 billion in debt.

Gamestop’s decline is highlighted by its dwindling same-store sales, which fell 0.3% in 2018 and 19.4% in 2019. In Q1 this increased to a 30%, accelerated by store closures. The pandemic has exaggerated the underlying problems that this company has experienced in recent years.

Rising digital sales are also causing GameStop headaches. However, it is likely that it will see increased sales of hardware with the new Playstation and Xbox consoles being released later this year. The Playstation will have an all-digital version which means that there will be fewer disc sales over the coming years. This may impact considerably harm Gamestop’s revenue.

Last year, the company unveiled a turnaround plan which included cutting costs, creating in-store gaming hubs, and building a digital platform. Management has succeeded in cutting some costs and increasing e-commerce sales. The stock has rallied in recent weeks, buoyed by the news that an institutional investor has bought nearly 10% of the outstanding shares. The stock is now in positive territory year to date. However, will this be enough with the company yet to address the danger of digital sales crippling its core business model.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.