When the Covid-19 pandemic began in early 2020, many consumers quarantining at home turned to video games for entertainment. The trend boosted video game stocks. But lately those stocks have fallen out of favor as investors ponder the impact that the reopening of the economy after the health crisis will have on the sector.
The major video game stocks peaked in early to mid-February. Since then, they have fallen as investors shifted into so-called “real economy” and value stocks.
“In our view, one of the big risks is the return to normalcy,” said John Patrick Lee, VanEck ETF product manager. VanEck has an exchange-traded fund focused on video games and esports called VanEck Vectors Video Gaming and eSports ETF (ESPO).
“A lot of these companies are at all-time stock price highs and all-time revenue highs,” he said. “So, there’s a concern that once people have the option to go to the movies instead of playing video games that they’re going to stop playing.”
Game Publishers Counting On E3 Lift
While consumers might spend less time playing video games post-Covid, the long-term trends in the gaming industry look very strong, Lee said.
After a big year for video game stocks in 2020, “a little bit of a reset would be normal,” Lee said.
The drop-off in interest in video game stocks could be related to seasonality, Benchmark analyst Mike Hickey says. The holiday season is the biggest period for video game sales and the first and second quarters are weak by comparison.
At this time of year, the next catalyst for video game stocks normally would be the annual E3 conference in Los Angeles, Hickey says. Last year’s E3 show was canceled because of the Covid-19 pandemic. And this year’s show will be an online event, running June 12-15, due to the lingering pandemic.
“Normally we have a breathing period and then you start to rebuild enthusiasm starting with E3 in June,” he said.
Video game publishers use E3 to build buzz for their upcoming titles. Major games due out later this year include “Halo Infinite” from Microsoft (MSFT), “Horizon Forbidden West” from Sony (SNE) and “Far Cry 6” from Ubisoft. Also on the release slate are “Battlefield 6” from Electronic Arts (EA) and the latest “Call of Duty” game from Activision Blizzard (ATVI).
New Consoles, Mobile Games In Focus
A tailwind for video game stocks now is the rollout of next-generation consoles from Microsoft and Sony, Hickey said. However, Microsoft Xbox Series X and Sony PlayStation 5 consoles have been in short supply since their debut in November.
Mobile video game stocks might fare better than the rest of the group as the economy reopens and people get out and about, Lee said.
“There’s a strong case to be made that companies that are focused exclusively on mobile games could be better positioned,” Lee said. However, all the top game publishers are ramping up their presence in mobile gaming, he says.
IBD’s Computer Software-Gaming stock group currently ranks No. 147 out of 197 industry groups that IBD tracks. Six months ago, it ranked No. 86.
“The pandemic boost is officially over,” Hickey said.
Video Game Stocks Forming Bases
Still, some major video game stocks are forming bases.
Nintendo (NTDOY) has been consolidating for the past 18 weeks with a buy point of 82.65. Like Activision, Nintendo stock is trading in the lower half of its base. So, it’s likely to face overhead resistance to any move higher.
Meanwhile, EA has shaped a cup-with-handle base with a buy point of 143.98, MarketSmith charts show.
Activision plans to report its first-quarter results on May 4. Nintendo will follow with its March-quarter report on May 6. EA will post its fiscal fourth-quarter earnings on May 11. Take-Two Interactive Software (TTWO) has scheduled its fiscal fourth-quarter report for May 18.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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