Why the Coming Super Cycle Will Lift Video Game Stocks

Image result for Why the Coming Super Cycle Will Lift Video Game StocksVideo game stocks, like Electronic Arts Inc. (EA), Activision Blizzard Inc. (ATVI) and Take Two Interactive Software Inc. (TTWO), have risen spectacularly over the past five years, but have taken a big hit over the past year and have lagged the rest of the market. That underperformance is about to change, however. The release of enhanced new gaming consoles over the next few years will fuel increased demand for video games and help to revive the lagging stocks of their makers, according to Barron’s.

What It Means for Investors

Sony Corp. (SNE) recently announced the launch of its newest console, the PlayStation 5, which will compete with primary rival Microsoft Corp.’s (MSFT) next console, code-named Project Scarlett. Both consoles are set to arrive just in time for the 2020 holiday season, kicking off a new video game console cycle that occurs about every five to eight years. That means a new cycle for video games will be kicking off as well.

Video game consoles and video games are what economists would call complementary goods. Like coffee and cream, when the demand for one goes up, so too does the demand for the other. “If you’re a gamer, if you drop $400 to $500 for a console, you’re obviously going to buy some games, too,” said Jefferies analyst Alex Giaimo. “It creates consumer demand.”

The video game console cycle tends to fuel stock returns along with it, not just for the console makers but for the game publishers as well. During the 12 months preceding major console launches in 2000, 2005, and 2013, shares of Activision, Take-Two and Electronic Arts beat the broad stock market by an average 26%, according to analysis done by Cowen, as reported by Barron’s.

Another factor that could help to drive video game sales and stock returns is the increasing popularity of eSports. Citing research from eSports analytics firm Newzoo, Needham analyst Laura Martin says that the eSports audience is expected to rise 14% annually to a total of 645 million by 2022. Martin is bullish on both Electronic Arts and Activision, despite Activision receiving recent blowback over banning an eSports player for comments made in support of protests in Hong Kong.

Looking Ahead

The rise of online streaming and cloud gaming poses a formidable threat to the traditional gaming industry. However, so far the games in the streaming universe have been no match for the big franchise games, and there are a number of technical hurdles preventing cloud gaming from offering the premier gaming experience, at least for now.

It “could be years, not quarters, before cloud gaming products become scaled viable alternatives for most gamers,” Brian Nowak of Morgan Stanley told The Wall Street Journal.