The video gaming industry witnessed an upsurge in demand last year due to remote lifestyles, social distancing mandates, and rising interest in digital entertainment. While people began resuming outdoor entertainment activities earlier this year, with several countries now reimposing pandemic restriction in response to the rapid spread of the COVID-19 Delta variant, the demand for video games is increasing again. Moreover, the increasing use of internet services and widespread availability of online games worldwide are projected to drive the industry’s growth in the years to come. The global video games market is expected to grow at a 12.9% CAGR over the next seven years.
However, Unity Software Inc. (U) has not been able to capitalize on the industry’s growth. Although the stock has surged 24.9% in price over the past month, the company’s weak financials compared to its peers make it susceptible to a pullback in the near term. In its last reported quarter, U’s net loss increased 442.4% to $148.34 million, and its loss from operations surged 500.5% to $149.18 million, demonstrating weak fundamentals. In addition, the stock has declined 21.3% year-to-date.
Therefore, we think it could be wise to bet on shares of fundamentally sound companies in this space Electronic Arts Inc. (EA), Playtika Holding Corp. (PLTK), and Ubisoft Entertainment (UBSFY). These three stocks are better positioned than U to cash in on the growing demand for video games.
Click here to check out our Video Game Industry Report for 2021
Electronic Arts Inc. (EA)
EA in Redwood City, Calif., creates and publishes games, content, and services for various platforms, including consoles, PCs, smartphones, and tablets. The company's games and services are built on a portfolio of intellectual property that includes well-known brands such as FIFA, Madden NFL, Star Wars, Battlefield, Sims, and Need for Speed.
Last month, EA’s subsidiary EA (Canada) agreed with Low Tide Properties and PCI Developments to occupy 1077 Great Northern Way in the new False Creek Flats. The company aims to join various other creative technology businesses, educational facilities, and associations in the False Creek Flats region to strengthen British Columbia's reputation as an innovation leader.
During the first quarter, ended June 30, 2021, EA’s net revenue increased 6.3% year-over-year to $1.55 billion. Its gross profit grew 5.6% from its year-ago value to $1.24 billion over this period. The company reported $204 million in net income, while its EPS came in at $0.71 over this period.
A $6.59 consensus EPS estimate for the current year represents a 14.6% increase year-over-year. Furthermore, EA has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. The $7.57 billion consensus revenue estimate for its fiscal year 2022 represents a 22.2% increase from the same period last year. The stock has gained 19% over the past nine months.
EA's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
EA is also rated a B grade for Value, Sentiment, and Quality. Additionally, within the Entertainment-Toys & Video Games industry, it is ranked #3 of 23 stocks.
To see additional POWR Ratings for Growth, Stability, and Momentum for EA, click here.
Playtika Holding Corp. (PLTK)
Israel-based PLTK is a mobile game developer that operates a platform that supports various casual and casino-themed games. With more than 34 million monthly active users, it has 15 games that it owns and administers, including free-to-play mobile games. The company uses Apple, Facebook, Google, and other online and mobile platforms to distribute its games.
For the second quarter, ended June 30, 2021, PLTK’s revenue increased marginally year-over-year to $659.2 million. The company reported $165.4 million in operating income, compared to a $72 million operating loss in the prior-year quarter. Its net income came in at $90 million for this period, versus a $139.6 million net loss in the second quarter of 2020. Moreover, its cash and cash equivalents increased 293.5% year-over-year to $1.18 billion.
PLTK is expected to generate 10.9% revenue growth for the current year. Its EPS is estimated to increase 237.5% year-over-year to $0.81 in its fiscal year 2021. The stock has gained 4.2% over the past month.
PLTK's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Value and Quality. In the Entertainment-Toys & Video Games industry, it is ranked #5 of 23 stocks.
In total, we rate PLTK on eight distinct levels. Beyond what we've stated above, we have also given PLTK grades for Sentiment, Growth, Momentum, and Stability. Get all the PLTK ratings here.
Ubisoft Entertainment (UBSFY)
Headquartered in Montreuil, France, UBSFY develops, publishes, and distributes video games in physical and digital forms for consoles, PCs, smartphones, and tablets worldwide. In addition, the company creates software such as scenarios, layouts, and game rules, and designs tools and game engines.
Last month, Sustainalytics, a leading provider of environmental, social, and governance (ESG) ratings, ranked UBSFY among the top 3% of companies in the Software & Services Industry, the top 5% of companies in the Entertainment Software Segment, and the top 6% of all 14,142 companies covered in its 2021 ESG Risk report. This recognition should help the company achieve its long-term commitment to making a positive global impact.
UBSFY’s sales increased 39.4% year-over-year to €2.22 billion ($2.61 billion) in the fiscal year ending March 31, 2021. Its operating income came in at €289.4 million ($339.88 million), compared to a €59.5 million ($69.88 million) operating loss in the prior-year period. Its net income came in at €103.1 million ($121.08 million) for this period, compared to a €125.6 million ($147.51 million) net loss in fiscal 2020. The company’s EPS came in at €0.85 ($1), compared to a €1.12 ($1.32) loss per share in the prior-year period.
Analysts expect UBSFY's revenue to increase 1.9% year-over-year to $2.77 billion in its fiscal year 2022.
It is no surprise that UBSFY has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Value, and a B for Growth and Stability. In the Entertainment-Toys & Video Games industry, it is ranked #4 of 23 stocks.
In addition to the POWR Ratings grades we have just highlighted, one can see the UBSFY ratings for Quality, Sentiment, and Momentum here.
Click here to check out our Video Game Industry Report for 2021
EA shares were trading at $140.99 per share on Wednesday morning, down $0.05 (-0.04%). Year-to-date, EA has declined -1.58%, versus a 19.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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