Gaming stocks: Fundamentally Global

1st article in the series "Fundamentally Global"

Here’s a riddle for you: what’s in common between Roblox Corporation, Redbox Entertainment and Warner Music Group? Hint: one is a gaming giant, another is a micro-cap kiosk vendor, and the third one is a global music champion. 

Sector definitions are too broad, so sector investment is not the answer

The answer to the above question is nothing - apart from the fact that they are all bundled together in the Entertainment industry, which is included in the GICS Communication Services sector. Maybe there’s no other way to define sectors, but there’s surely a better way to invest than buying into an ETF or a fund with different types of companies pulled into a mixed bag of everything and nothing specific.

When people look at investing in equity markets, they may focus on investing in specific sectors because they believe these sectors will help them reach their financial goals. For example, some sectors may typically be less volatile, which would appeal to investors who are focused on predictability and capital preservation. Meanwhile, other sectors that have more growth prospects and higher volatility may appeal to investors with a higher risk tolerance.

Since sectors’ definitions were developed, economic industries have changed almost unrecognizably, and many definitions have become quite irrelevant. For example, the Communication Services sector in the past consisted mainly of telephone companies - historically safe, conservative industry that grew regardless of the economy - and a small number of pay television providers. Nowadays, this is one of the most diversified sectors in the GICS, including totally unrelated businesses.

Even when you go down the ladder to narrower sub-sectors within the sector, you still get a bundle of unconnected companies, such as Walt Disney, Formula One and Skillz Inc., sitting together on the list of the Entertainment sub-sector. As we see, Sector and Sub-sector ETF investing cannot help build a portfolio of stocks with clear definitions and investment goals, as the connection between stocks held in a sector ETF/Fund/Portfolio is very artificial at best.  

Investors prefer stocks whose business they understand

In the “everything rally” we had until this year, the tide of easy money lifted all stocks. There’s a cohort of traders that has risen on the back of “easy-money” policies during the Covid-19 lockdowns; now seeing their first ever market decline. Many of them, who tried to maintain the same trading “strategies” of buying on hype, are now counting heavy losses; some have lost confidence and surrendered. 

Meanwhile, the rational investors are learning to live with the market volatility, trying to find opportunities among the ruins of previously high-flying names. When the economy is slowing, interest rates are rising, inflation is soaring and the stock markets are haywire, rational investors prefer to screen their holdings for quality, which means checking the companies’ fundamentals. 

And to do that, they want to understand the businesses they buy into. When you understand how the companies in a specific industry are making money and how their business is affected by the economic cycle, you can make your investment decisions based on their intrinsic value and judge their growth and return potential. This way you can easily compare the individual stocks and choose the ones that offer stronger fundamentals that materially increase the chances of better stock performance. 

When you understand the business, geography doesn’t matter

And when you understand the business, it opens a world of opportunities - literally. For example, if an American trader is interested in gaming stocks because she can understand, analyze and compare the metrics of different gaming companies, it doesn’t matter if the company whose shares she buys is located in California, France or Korea. Moreover, if that is her area of expertise, it is easier for her to understand the business of a Chilean or Vietnamese game developer than that of a U.S. football league operator or a cinema chain owner.

So, savvy investors and retail traders would use a bottom-up investment approach: choosing their field of expertise and working from that point to find quality stocks in the areas of their interest and understanding, using fundamental analysis - while keeping in mind the macroeconomic factors, of course.  

Gaming stocks around the world: comparing the fundamentals

Covid-19, with its lockdowns and government checks, was a boon for gaming companies. But, as Warren Buffett says, “when the tide goes out do you discover who's been swimming naked”. Now, as we are back to much less favorable stock market reality, even gaming is no child’s play, but business like any other - which means that companies with strong fundamentals, good management and solid market share growth prospects, will eventually outperform, while others will suffer (and lose their investors’ money). 

So let’s have a look at some gaming stocks, trying to find quality companies, whose financials are strong enough to provide them with high chances to outperform their competitors, while their stock isn’t overbought yet, leaving some potential for an upside.

First names that come to mind of anyone thinking about gaming are probably Activision Blizzard, Take-Two Interactive, Electronic Arts, and Roblox: large-cap US companies. Needless to say that these companies are very well covered by analysts and media, so that the investor community as a whole shares the same knowledge about any substantial facts about them.  When all funds and ETFs that have any relation to the gaming industry hold the same names, it’s hard for a retail investor to gain an upper hand in the stock market’s zero-sum game.   

Anyway, just to sum up the above mentioned companies: out of the four, only Electronic Arts has received a BUY rating from our genius AI analyst.

Company Deshe AI Rating Fundamental Analysis
Electronic Arts Inc. (EA) BUY https://report.desheanalytics.com/EAQ1
Activision Blizzard, Inc. (ATVI) HOLD https://report.desheanalytics.com/ATVIQ1
Take-Two Interactive Software, Inc. (TTWO) HOLD https://report.desheanalytics.com/TTWOQ1
Roblox Corporation (RBLX) UNDERPERFORM https://report.desheanalytics.com/RBLXQ1

So, should you just buy Electronic Arts stock and be done? Well, it’s worth knowing that EA’s TTM P/E ratio is around 50, more expensive than 80% of the US companies in the same line of business. 

So well-known US companies are either expensive or their fundamentals aren’t great. Where do we move from here? If you are about to say “France” meaning Ubisoft Entertainment SA (UBI), you’ll be disappointed: our AI was not impressed too much by UBI’s Q1 2022 report, giving it a rating of HOLD: https://report.desheanalytics.com/UBIQ1. Meanwhile, with a PE of almost 70, UBI is too expensive for a stock that is expected to perform on par with peers.

Don’t worry, global gaming doesn’t end with Ubisoft. There are many great companies in the gaming industry all around the world - companies with strong fundamentals which earned them a BUY or even STRONG BUY badge from our bias-controlled AI:

Company Country
Deshe AI Rating Fundamental Analysis

iQIYI, Inc. (IQ) 

China STRONG BUY https://report.desheanalytics.com/iQIYI
Nexters Inc. (GDEV) Cyprus BUY https://report.desheanalytics.com/GDEV

Nihon Falcom Corporation (3723)

Japan STRONG BUY https://report.desheanalytics.com/3723

Toei Animation Co.,Ltd. (4816)

Japan BUY https://report.desheanalytics.com/4816

The Farm 51 Group (F51)

Poland BUY https://report.desheanalytics.com/F51
Ncsoft Corporation (A036570) South Korea STRONG BUY https://report.desheanalytics.com/A036570
Daewon Media Co., Ltd. (A048910) South Korea STRONG BUY https://report.desheanalytics.com/A048910

HANBIT SOFT Inc. (A047080)

South Korea STRONG BUY https://report.desheanalytics.com/A047080

Softstar Entertainment Inc. (6111)

Taiwan STRONG BUY https://report.desheanalytics.com/6111

Gamesparcs Co.,Ltd. (6542)

Taiwan BUY https://report.desheanalytics.com/6542

Even in volatile markets and a weakening economy, there are great stocks to be found. As we broaden our perspective to include the entire universe of investment opportunities, removing our home bias and closing information gaps, AI can help investors find great stocks with solid upside potential.

 

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