3 best gaming stocks to buy in January


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By 2021, it was estimated that people had spent $ 178 billion on video games globally, making it one of the largest categories of consumers. This number is expected to grow at a rapid rate to reach $ 269 billion in annual spending by 2025. This means that over the next three to four years, there will be approximately $ 91 billion in spending. New the annual spending on video games that businesses can research. This huge, age-old tailwind makes the gaming industry an attractive hunting ground for finding potential new investments.

The top three gaming stocks that could make potential new investments in January are Electronic arts (NASDAQ: EA), Nintendo (OTC: NTDOY), and Take-Two Interactive (NASDAQ: TTWO). Here’s why.

Image source: Getty Images.

1. Electronic arts

Electronic Arts is the world’s leading sports video game publisher. He is best known for his Soccer and Madden NFL franchises, which are the main drivers of revenue among its sports titles. In addition to sports franchises, EA offers many other games, the most important of which is Apex Legends, the sims, Battlefield, and some Star wars Games.

In 2021, EA made multiple acquisitions, primarily to bolster its mobile gaming and racing strategy. It acquired Codemasters, the world’s largest developer of racing video games, for $ 1.2 billion. The purchase includes the rights to the Formula One video game franchise, which is one of the fastest growing sports in the world. The company also bought Glu Mobile for $ 2.4 billion in early 2021, which brought in a bunch of existing mobile games and a large team of mobile game developers. EA’s management hopes these two acquisitions will help increase its mobile game bookings (the equivalent of video game revenue). In the last quarter, the company made good progress on this strategy, with mobile bookings increasing 62% year-over-year to $ 279 million.

For fiscal 2022, which ends in March, EA expects to generate $ 7.6 billion in net bookings and $ 1.95 billion in operating cash flow. With a market cap of $ 37.4 billion, EA is trading at a forward price-to-cash flow (P / OCF) ratio of 19. If you think the company can keep growing its bookings and Cash flow at a decade pace, this might be an optimal time to take a position in this long-term compounder.

2. Nintendo

This second title is probably the most recognizable video game company in the world: Nintendo. The company has remained near or at the top of the video game industry for decades, creating huge franchises like Mario, Zelda, and Animal crossing, Just to name a few. It also owns a large part of the Pokemon Company, the world’s best entertainment franchise, which gives it exclusive rights to publish the Pokemon video games.

Along with the development of games, Nintendo sells its own hardware peripherals. Its most recent iteration is the Nintendo Switch, which has sold nearly 93 million units since its launch in 2017. Nintendo investors need to watch two big metrics, both of which are interrelated. First of all, the heart of the business begins with the sales of physical units. For the full year ending in March, management plans to ship 24 million Switch units, some of which are on hold due to semiconductor supply constraints. Over the next several years and beyond, investors should expect Nintendo to continue to sell a large number of Switch devices (or whatever the name of the next console is) to help keep its business going.

Sales of hardware lead to sales of software (i.e. games), the other important metric for investors to follow. For the full year, Nintendo expects to ship 200 million software units. This leads to an operating profit forecast of $ 4.5 billion for the full year. With a market cap of just $ 42 billion when you write off the company’s huge cash flow, that gives the stock a forward price-to-operating profit ratio of just 9.3. It’s very cheap for a company that has dominated the gaming industry for so long, which is why it’s one of the best gaming stocks to buy this month.

3. Take-Two Interactive

To round out that basket of games, we have a stock that is not as cheap as Nintendo or EA, but has seen impressive growth numbers over the past decade. This stock is Take-Two Interactive, the publisher of Grand Theft Auto, Red Dead Redemption, and NBA 2K. He has other franchises that he publishes games for, but these three are the most important from an investment standpoint.

Over the past decade, Take-Two has driven revenue and booking growth through its live services, which generate more recurring revenue from customers. The most important of these is GTA Online, the virtual world / playground attached to Grand Theft Auto V. Although GTA V was launched in 2013, Take-Two still generates a lot of bookings and cash flow from GTA Online with over 40 updates released since its launch. He also saw fine contributions from NBA 2K live services and Red Dead Redemption Online.

From a financial perspective, Take-Two’s customer recurring spend increased at a compound annual growth rate (CAGR) of 37% from fiscal 2017 to fiscal 2021. In absolute terms, recurring bookings fell from $ 665 million to $ 2.3 billion during this period. This led overall net bookings to grow at a 17% CAGR, reaching $ 3.5 billion in fiscal 2021.

In fiscal 2021, Take-Two generated $ 912 million in operating cash flow, which is expected to drop to $ 380 million in fiscal 2022 (which ends in March) as Take -Two reinvests for more growth and future versions of games. With a market cap of $ 18.2 billion, that gives the Take-Two stock a P / OCF ratio of 47.9. It sounds expensive, but investors should expect cash flow to return to near or above $ 1 billion per year over the next several years as Take-Two emerges from this development cycle. current and start releasing more games, one of which could be GTA VI.

If you are confident in the execution of Take-Two’s development and believe that it can continue to grow its live service bookings at a high rate, then a market cap of $ 18.2 billion is way too cheap. for this long-term component.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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