Coming off a highly profitable 2020, Unity Software, Take-Two Interactive, and Activision Blizzard still make great long-term investments.
Jan. 7, 2021
Gamers sheltering at home during the pandemic dramatically increased the time they spent playing video games. This trend translated into greater revenue and customer engagement for three of the biggest gaming companies in the market.
Unity Software
Unity Software (NYSE:U), which develops the Unity Engine for video games and other applications, was one of the best-performing IPOs of 2020 with its stock up over 513% since its debut in September. However, with a market cap of around $42 billion and guidance for only $754 million in 2020 sales, shares of Unity are looking a little inflated at the moment.
Over 50% of all mobile, PC, and console games are built with Unity tools and the software now serves over 1.5 million monthly active creators. In 2019, an average of 3 billion apps built with Unity were downloaded each month, including favourites 'Super Mario Run', 'Among Us', and 'Monument Valley'.
Unity's revenue grew 44% year-over-year (YoY) to $552 million in the first nine months of 2020. In the third-quarter, Unity managed to generate 44% more revenue from its existing customers, indicating its ability of cross-selling new tools and services.
Unity just landed a partnership with Snap, the company behind Snapchat, so Unity's advertising supply will now be available for the Snap Audience Network and its 249 million daily active users. Currently, non-gaming is only a small part of Unity's revenue at the moment, but with the company already powering 50% of the world's mobile games, it will need to focus on different services to ensure continued growth going forward.
Unfortunately, the game engine may be overvalued as its high valuation -- 56x 2020 sales -- will require it to retain its current levels of growth for years which may be difficult as it now faces tougher competition and more data-gathering rules. However, the company is proving that it's a good option as a long-term stock as it is now expanding into augmented reality, virtual reality, and industrial 3D design to diversify its revenue streams.
Take-Two Interactive
Producer of Grand Theft Auto, Take-Two Interactive (NASDAQ:TTWO) attracted the attention of bulls in 2020 as stay-at-home trends during worldwide lockdowns sparked interest in gaming stocks.
The company also owns two mobile publishers: Social Point and PlayDots, but it doesn't usually report its publishers' revenues separately. Take-Two Interactive only reports its total product revenue, which comes from direct sales of its games, and from other revenue including virtual currency, in-game purchases, add-on content, and additional services.
For the fiscal quarter ended September 2020, the company reported revenue of $841.1 million, down from $857.8 million in last year's fiscal second quarter. During the same quarter, recurrent consumer spending (which is generated from in-game spending including virtual currency, add-on content and other purchases) increased 56% and accounted for 59% of total revenue. This highlights the importance of the need to monetize games with in-game transactions to ensure the product is making money even after it's sold.
Some of the company's top growth revenue engines weren't even launched last year, like GTA V for example which was released in 2013 but an online play version has extended the longevity of the game.
As a result of the pandemic shifting more players to online games and digital downloads, Take-Two's net income surged 59% (YoY) to $188 million in the first half of 2020. Investors flocked to the stock causing shares to increase 40% last year.
Take-Two's core business is strong, but its stock looks slightly overvalued at the moment. Investors who are looking for a more stable gaming stock might want to consider Activision Blizzard which has a more diverse portfolio of games.
Activision Blizzard
Which brings us nicely on to our final gaming stock, Activision Blizzard (NASDAQ:ATVI), which had a stellar 2020 by producing consistent results. The company beat its prior outlook of $1.80 billion by ending Q3 with $1.95 billion in revenue resulting in Activision Blizzard raising its 2020 full-year outlook from $7.3 billion in revenue to $7.7 billion.
It's no fluke that the company has been so successful -- its management team made changes as the video gaming industry evolved quickly. The company focused on its core franchises, such as 'Call of Duty', by expanding the game into mobile and online multiplayer gaming experiences. In the third-quarter of 2020, Call of Duty's mobile version had 300 million downloads and now plans to launch in China soon as 50 million users have already pre-registered for the game.
Activision Blizzard is well-positioned to experience continued revenue growth in 2021 but the challenge lies in maintaining consumer interest once a vaccine is administered as its 270% (YoY) Q3 revenue growth will be hard to replicate.
The California-based company net income was $604 million in Q3, which was nearly triple last year. Furthermore, Activision Blizzard also holds $21.6 billion in total assets, versus only $7.2 billion in total liabilities. The cherry on top? The video gaming company also pays a dividend to its shareholders.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
