Video games have become the largest entertainment industry, with an estimated annual value of around $200 billion. Gaming has always been a promising area to check out for under-the-radar growth stocks, as it’s an industry that’s not widely understood on Wall Street. One reason is that video game companies don’t offer year-over-year revenue growth like typical growth stocks, but they can still offer above-market returns.
Prospects for further growth in the industry over the next decade look very favourable. Various technology trends, such as cloud gaming, faster mobile connection speeds, and continued advancements in graphics technology, are making games more accessible and beautiful, and it’s a perfect recipe for more gamers and more revenue growth.
While investors can’t go wrong investing in the best gaming companies, two promising ideas that could offer great returns are branded gaming peripherals. Corsair Gaming (CRSR 1.69%) and under-following game producer Ubisoft Entertainment (UBSFF -2.00%) (UBSFY -0.17%).
1. Privateer Game
People don’t have to invest in companies that make video games to get good returns. Another option is to invest in the companies that enable millions of people to play games, such as one of the leading manufacturers of gaming peripherals, Corsair Gaming.
In addition to making high-end keyboards, headsets, and mice designed for gaming, Corsair also provides components and systems to build custom gaming PCs. The company’s total revenue grew 12% in 2021 to $1.9 billion, amid a challenging environment of component shortages and price increases that put pressure on sales .
Management sees a more favorable demand environment opening up in the second half of 2022 and into 2023 as prices for computing components, such as GPUs, begin to decline, allowing gamers to upgrade their PCs more cheaply with Corsair products. To be clear, Corsair does not make GPUs or graphics cards as they are sometimes called. It makes computer cases, power supplies, and other hardware components that people tend to buy when they upgrade their graphics card.
In the long term, it is expected that more gamers will not only play games but also stream their gameplay on social gaming platforms like Amazonit’s Twitch. This will drive growing demand for Corsair’s streaming products, such as lighting and cameras, which have already emerged as the company’s fastest growing sales category.
In the long term, management estimates that the peripheral market will grow between 20% and 25% per year. With a cheap price-to-earnings ratio of 10 times this year’s earnings estimate, the stock is too cheap because the market is essentially saying the company will never see growth again at this valuation. But the long-term tailwinds in the industry are real and will almost certainly drive the company’s revenue, earnings and stock price higher over the next decade.
2. Ubisoft Entertainment
Ubisoft doesn’t get as much attention from US investors as top game makers like ActivisionBlizzard and electronic arts, but Ubisoft is one of the best video game producers in the world. In the 2022 fiscal year ending in March, the France-based company generated $2.3 billion in revenue and had 141 million players across all of its games. Some of his notable titles which are best sellers in the industry are Assassin’s Creed, Far cryand rainbow six.
Ubisoft has a differentiated range of games that stands out from its competitors. Instead of designing games that follow the traditional formulas of standard game genres, such as first-person shooters and action-adventure games, Ubisoft’s best games take a different approach in game design. games. For instance, rainbow six competes with the best seller in the industry, Call of Duty from Activision. However, instead of copying the casual style of play of its competitors, rainbow six is a tactical shooter aimed at the esports crowd.
Ubisoft is also taking a different approach to how it monetizes games. The company follows its “golden rule”, which is to allow players to enjoy the full game without having to spend more to unlock additional levels or features while playing the game.
The approach worked. Ubisoft has increased bookings (a non-GAAP measure) by 22% per year over the past five years. It is positioned to generate more growth, with the console market expected to grow 10% to $81 billion in 2022, according to Deloitte Insights. That’s a good thing for Ubisoft, since most of its revenue comes from console game sales, with the balance coming from PC and mobile platforms.
Ubisoft is investing to continue growing its audience, but its stock is much cheaper on a price-to-sales basis than its US-based competitors. Activision Blizzard, which is being acquired by Microsoft for $68.7 billion, trades at 7 times sales, while Electronic Arts trades at 5.3 times sales. Investors can buy Ubisoft shares for a cheap sell multiple of just 2.3.
At Ubisoft, investors are getting a bargain for one of the world’s leading game developers.