Video Game Stocks: A Play for Growth

Video games are going for the win in 2023.

After a sluggish 2022, the video gaming industry is set to unlock new levels of growth next year as more high-budget, high-profile games and next-generation consoles hit the market. In fact, 2023 is likely to be an inflection year, as long as publishers continue to drop new “triple-A games,” considered the best of the genre. The recovery could even start as soon as the end of this year, as new titles launch in anticipation of the holiday season, creating an early window of opportunity for investors.

“Video game development teams are seeing better productivity and have improved efficiency. At the same time, titles that were strategically pushed back are now looking more likely to launch in 2023,” says Seyon Park, the Morgan Stanley Research analyst covering telecom and internet stocks in Seoul. “We see an abundance of quality content as the single most important factor behind our expectations for a strong market recovery heading into the upcoming holiday season.”

A few key factors are likely to spur gaming growth, Seyon says, including:

More next-generation consoles and new games: Updated gaming consoles will be available to more households next year, as supply chain problems ease.  For example, one major console manufacturer is expected to sell around 18 million units by March 2023, bringing the installed base of gaming consoles to a total of about 37 million units sold since 2020. The increase in next-gen gaming consoles in turn feeds triple-A game development. Many third-party publishers pushed back game launches amid these global supply chain disruptions, and so Morgan Stanley Research expects new title launches to accelerate going into 2023.

Regulatory shift in China: To curb gaming addiction among young people, the Chinese government in 2021 restricted players under 18 from gaming on school nights and to one hour of play on weekends and holidays. That’s likely to change, says Seyon.  “We see the impact of regulatory measures in China waning, and gradually recovering as restrictions on minors normalizes,” he says, noting that China approved several new game licenses in September. “These are initial signs the regulatory environment has turned the corner,” Seyon adds.

Defense in a potential downturn: Recessions aren’t necessarily bad for gaming: Staying at home fighting zombies is generally cheaper than a night out with friends, even with the initial investment in games and consoles. “Game sales have proven resilient to economic down-cycles,” says Omar Sheikh, an analyst on the European Media team. This provides investors with an opportunity to accumulate holdings early in a sector that offers attractive valuations. 

Historically, consumers have kept spending on video games during recessions. 

Despite the overall optimism, there are some factors that could mean game over for growth:

• Relying on proven content rather than developing new games: Like many entertainment industries, game publishers typically invest in proven winners rather than pour money into new genres. That mindset is a potential problem, since “innovative content is what brings new players to the gaming world,” says Sheik. “The robust pipeline of new games in 2023 can demonstrate that creativity is still flourishing in the gaming world, but should this fall short, we could see downside to our longer-term growth outlook.”

• A slowing mobile market: There's already a high base of users, and penetration of mobile games is starting to reach saturation, particularly for markets in the U.S., Korea, Japan and China. “This implies that spend per gamer will need to be an important driver for growth, which is why we are emphasizing content quality,” Seyon says.

• The threat of short-form video: Short-form video platforms have garnered the attention of many potential gamers, who are choosing the format over other online entertainment, particularly in China. Quality game content has long been a driver of the industry, Seyon says, but “short-form video could be a risk to more casual genres.”

All in, however, Morgan Stanley analysts remain bullish on the industry. “Content is a key driver to market growth, especially for more mature markets, and investors should focus on publishers with well-established intellectual property and creative development teams,” says Sheikh. “Valuations at multi-year lows are highly attractive for long-term investors, as those companies with a record of development and a strong pipeline could see earnings growth beyond next year.”