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Old Guard Holding Its Own in Online Gaming

19 May 2015 in Trading Ideas

The transition to online games has proved recently to be a boon for traditional video game companies and in turn, their investors.

Earlier this month, Activision Blizzard raised its full-year profit and revenue forecasts and reported better-than-expected quarterly results, helped by growth in its high-margin digital business.1

As Reuters reported, game publishers have been shifting to the lucrative digital business from physical sales of games as consumers shift from consoles to playing on smartphones and tablets.

In its most recent first quarter, revenue from Activision Blizzard’s digital business rose 53.3% from a year earlier, helped by robust online sales of “Destiny” and its “Call of Duty” franchise.

Last month, the company launched “Hearthstone: Heroes of Warcraft” on iOS and Android mobile phones.

Meanwhile, rival Electronic Arts has already made smartphone versions of its top-selling games “Madden NFL” and “FIFA”. EA also reported better-than-expected results earlier this month, helped by strong digital sales and the release of “Battlefield Hardline”.

Activision Blizzard had said earlier that it planned to launch the next generation of “Guitar Hero” this fall and that the game would be available across consoles, smartphones and tablet devices.

“It’s a good story,” Wedbush Securities analyst Michael Pachter told Reuters, adding that “Guitar Hero” would “add a lot” to the company’s slate.

The well-received financial reports by Activision and EA have in turn helped the performance of the companies’ stocks, which have a more than 43% weighting in the Online Gaming World motif.

In the past month, the motif has increased 10%. In that same time frame, the S&P 500 has gained 1.6%.

Over the past year, the motif has risen 40.5%; the S&P 500 is up 15.2%.

According to a recent forecast by Research and Markets, digital gaming revenues already account for a double-digit share of the gaming revenues worldwide and are forecasted to see their share rise further. Among the important trends worldwide are the proliferation of the free-to-play model, and the phenomenon of video streaming of games and the growing popularity of eSports.2

Unsurprisingly perhaps, mobile games are the brightest performer: gaming revenues via smartphones are forecasted to double through 2017, while gaming revenues via tablets are expected to triple. Though competition has intensified with new entrants and a large number of small publishers, the market is still dominated by large publishers, the report said, with blockbuster games such as the “Clash of Clans” by Supercell and “Candy Crush” by King Digital.

Asia-Pacific was the largest mobile gaming market and the largest games market overall in 2014, according to Research and Markets. Online gaming revenues there are forecasted to continue growing at double-digit rates in the next several years.

In China alone, the report said, there were several hundred million online gamers, involving over half of Internet users. By mobile gaming revenues, China is set to overtake even the US in the near future. Southeast Asian markets are drawing the attention of Asian and international gaming companies, with close to a hundred million online gamers in total in the region, and an even larger number of mobile gamers.

Meanwhile, in North America a common trend in both Canada and the US is declining revenue of pay-to-play multiplayer games, while the free-to-play model is on the rise, according to the forecast. In the US, digital gaming revenues topped physical game sales for the first time two years ago and are likely never looking back.

Whether the larger companies keep their current market share or not, the secular growth in online and mobile gaming looks unlikely to change any time soon.

1Subrat Patnaik and Anya George Tharakan, “Game maker Activision Blizzard raises forecast as digital sales grow,” May 6, 2015, http://finance.yahoo.com/news/videogame-maker-activision-blizzard-raises-211102800.html, (accessed May 18, 2015).

2Press release, Research and Markets: Global Online Gaming Market 2015, May 6, 2015, http://www.businesswire.com/news/home/20150506005454/en/Research-Markets-Global-Online-Gaming-Market-2015#.VVqEEpdVhBc, (accessed May 18, 2015).