These Three Stocks Will Be Key Players In 2024's Gaming Boom, Says Analyst

In a recent industry primer released by BMO Capital Markets, a positive outlook for the gaming sector in 2024 was highlighted emphasizing the substantial growth potential of megahit titles and the expanding console market.

What Happened: The report underscored a significant shift in investment strategies within the video game industry compared to a decade ago, urging investors to focus on key AAA console games and outlining the promising positions of leading franchises such as Electronic Arts Inc's EA EA Sports FC, Take-Two Interactive Software Inc's TTWO Grand Theft Auto and Roblox Corp's RBLX Roblox.

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Over the past decade, the global video game industry witnessed an impressive surge, with revenues more than doubling to an estimated $193 billion in 2023.

The number of gamers worldwide has similarly skyrocketed, reaching an estimated 3.4 billion users, showcasing the immense potential for continued growth.

"We think it is crucially important to own the biggest, baddest franchises like EA SPORTS FC (EA), Grand Theft Auto (TTWO) and Roblox (RBLX)," BMO analyst Brian J. Pitz wrote. "We want exposure to the surging console market. And we want to avoid exposure to the massive Chinese gaming market, where a government crackdown on playtime and spending is pressuring revenue."

BMO's outlook for 2024 remains optimistic for the gaming sector, foreseeing robust growth in the console market, particularly in the U.S., though offset by ongoing regulatory challenges in China. The report projects sustained revenue and user expansion in the coming decade, driven by increasingly immersive and monetizable gaming experiences.

The report stresses three critical factors driving investment preferences:

• Console Market Expansion: BMO forecasts a potential doubling of the PlayStation 5 and Xbox Series S|X install base by 2027 (from ~80 million to ~160 million). Companies such as EA and Take-Two, which generate 60% and 43% of revenue from console games, respectively, are well-positioned to benefit from this trend.
• Dominance of Megahit Titles: Large AAA games hold a competitive edge, drawing users away from smaller titles due to powerful network effects. Developmental focus and investment on these key games have escalated, making it challenging for smaller franchises to compete.
• Evolution of Business Models: Top AAA franchises are expanding into various platforms and segments by embracing new business models and game modes, consolidating audiences across devices and regions. This trend benefits franchises like EA Sports FC and Grand Theft Auto, allowing for sustained cash flows.

The report highlighted EA Sports FC (formerly FIFA) and Grand Theft Auto as examples of evergreen franchises, projecting their enduring success in generating substantial revenue in the future.

Additionally, Roblox was identified as a well-positioned, free-to-play megahit game with vast growth potential, especially with its unique user-generated content ecosystem.

Roblox, functioning not just as a game but as a platform where users also act as developers, showcased remarkable engagement statistics. Moreover, BMO added the platform solved its "biggest problem": its ability to retain users beyond the age of 13.

"We think the company has achieved a significant inflection point: with its massive user base and deep player engagement trends, the company has all the ingredients to dramatically improve monetization over time," said the BMO report, adding, "With our expectation that RBLX will hold costs relatively flat, we see meaningful operation leverage and improved cash flows going forward."

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Photo: ELLA DON on Unsplash