For investors this year, it's been game over for video game stocks — except those involved in mergers and acquisitions.
The sector got a huge boost during stay-at-home orders in the first year-plus of the Covid-19 pandemic. But as vaccines became more widely available and people started resuming activities outside the home, video game sales suffered.
The first-quarter earnings season saw video game stocks delivering mixed to disappointing reports as consumer spending normalizes in the segment.
The video game stocks that have held up the best recently are those that are being acquired or are rumored to be potential acquisition targets.
Take-Two Kicks Off Round Of Acquisitions
Take-Two Interactive Software started the current round of consolidation with its acquisition of mobile games publisher Zynga. Take Two announced the $12.7 billion deal on Jan. 10 and completed the transaction on May 23.
Microsoft followed with its pending acquisition of top publisher Activision Blizzard. Microsoft announced that blockbuster deal, worth $68.7 billion, on Jan. 18.
Then on Jan. 31, Sony announced a deal to acquire privately held game studio Bungie for $3.6 billion.
On Feb. 24, mobile gaming firm Playtika disclosed that it is evaluating strategic options, including a possible sale.
More recently, Electronic Arts and European-traded Ubisoft have been looking for buyers, according to news reports.
More Deals Predicted For Video Game Stocks
"Consolidation is definitely going to continue," Benchmark analyst Mike Hickey told Investor's Business Daily. "They're all on sale. They're all discounted."
Take-Two Chief Executive Strauss Zelnick also sees more consolidation ahead.
"Industrywide, I was calling for consolidation for a really long time and then finally I turned out to be right," Zelnick told IBD.
After Zynga, Take-Two will continue to look for earnings accretive acquisitions, he said.
"Our story has historically been one of organic growth with very specific strategic acquisitions along the way," Zelnick said. Those deals include "the acquisitions that got us into the mobile business in the first place and acquisitions of smaller and medium-size studios that bring to us great teams and great intellectual property."
EA Might Opt To Buy Smaller Players
Electronics Arts reportedly has sought out large media companies, such as Comcast, as potential merger partners.
But if those overtures don't work out, EA could decide to gobble up smaller players, Baird analyst Colin Sebastian said in a recent note to clients.
"Despite already making a number of acquisitions over the past year (Glu, Codemasters, Playdemic), we note that valuations in the sector remain attractive vs. historical levels, which could justify further consolidation in the market," Sebastian said.
He went on to say: "We note that EA made what could be the most successful acquisition in the recent history of video games (Respawn in 2017), which ultimately led to the creation of the company's most valuable game (Apex Legends)."
Video Game Stocks Face Tough Compares
Wedbush Securities analyst Michael Pachter said video game stocks are facing difficult comparisons to the stay-at-home days of the Covid pandemic.
"2022 is the year that we're working off the shelter-in-place benefit," Pachter told IBD. "They all minted money during Covid and they all banked it."
Wall Street has been unfairly lumping video game stocks in with general media stocks, which have lower growth multiples, Pachter said.
Also, institutional investors don't respect the mobile gaming business, despite its heady growth prospects, he says.
IBD's Computer Software-Gaming industry group ranks No. 127 out of 197 groups. It includes 22 video game stocks, led in market value by China-based NetEase, Activision, Nintendo and EA.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
