For the past five years or so, many experts have been predicting that we’re going to soon be heading into a period of market correction, with stock prices right across the board being pushed downwards.
Yet, despite this, the value of companies just keeps going up and up and up. There are several factors that are driving this, including a much higher number of retail investors and day traders, continued money printing by central banks, and low interest rates forcing savers to accept more risks to earn a reasonable return on their capital.
And while high tide will make all boats rise, some sectors and asset classes present a greater opportunity for the investors than others. One of these is the gaming industry, which has seen companies within it grow their market capitalization several times over in the last couple of years.
But how do gaming companies compare to other investment opportunities, and would they be good to include in your portfolio?
A Lot of Growth Already
One factor that may attract some investors and could be a warning sign to some others is the fact that gaming companies have already enjoyed strong share price growth in the last 12 months. Take-Two Interactive is four times more valuable than it was five years ago, and 50% higher than where it was this time last year. Similarly, Electronic Arts has doubled in value over the last five years and risen 31% since March 2020.
However, both have seen their share prices trend downwards since the New Year, despite the news, reported by the investment site, The Motley Foot, that EA would begin to pay dividends at the end of 2020.
Many publicly traded iGaming companies have fared even better, enjoying a bullish start to the year on top of longer-term upward movements. For example, 888 Holdings which operates an online casino site in several US states and many other territories around the world, saw its share price rise by around 15% between the third and fourth weeks of March. The company has also doubled in value between September 2020 and March 2021, and quadrupled since March 2020.
Compared to other industries and asset classes though, gaming companies aren’t really standing out. Some cryptocurrencies like Bitcoin have also grown significantly in recent years, as have the share prices of companies like Apple, Microsoft, and the electric car company, Tesla.
But gaming companies also offer lower volatility than some popular stocks like GameStop and AMC, making them more attractive to value investors.
Dividends are a share of a business’s profits that are paid to all those that own its stock. Companies pay them when their managers don’t believe that there are any better things they can do with the money. They’re popular among many investors as they provide an income that they may partially or wholly live off.
Historically, many of the most famous gaming companies haven’t paid dividends. For example, Take-Two’s dividend history shows the company last paid one back in September 2008, while Ubisoft has never shared its profits with shareholders.
Electronic Arts has recently begun issuing modest dividends of $0.17 per share per quarter, giving an annual yield of around 0.51%. Making it an attractive proposition for those investors that want to earn cash from their holdings.
iGaming companies have been much more generous with their dividends. With many paying several cents per share over the last few years, significantly more the Electronic Arts and most retail savings products.
Even small dividends provide more income than some other popular investments like Bitcoin and precious metals because none of these alternatives have any earnings to share, with investors relying on asset value growth for profit. Even companies that are popular among retail investors at the moment, such as Tesla, don’t pay dividends.
Potential for More Growth
There are two reasons why the price of an investment asset may go up in value. The first is because the underlying value of the asset has increased. For example, if a company makes more profit thanks to a new product or improved efficiency, it will have a larger balance sheet due to the increased amount of cash it has.
The second is if investors see potential for the value and/or profitability of the company to grow in the future. Some investors will make this assessment using analysis, while others will simply “speculate” on what they think will rise. This growth can come even if the underlying value has not increased.
Bitcoin and Tesla are two examples of the latter, with more and more investors piling in all the time. In doing so, they drive up the price of the assets because demand is higher than supply.
Gaming companies, on the other hand, have plenty to offer investors that are looking for tangible value. Their revenues and profits have been rising year after year, thanks to microtransactions and the move to free-to-play games. Many are also extending the life of their existing IP, which is generally cheaper and less-risky than developing entirely new games.
We’re also seeing this trend with tech companies like Amazon and Microsoft. They’ve enjoyed strong growth in the last year, strengthening their already-strong positions in the markets. In fact, the big five tech firms have almost single-handedly helped the S&P 500 recover from its lows of March 2020.
Investing in start-ups can provide a greater potential for growth than gaming or tech companies, though this does come with significantly greater risk too. Therefore, many investors may see established gaming companies as a more attractive option than new businesses within untested but innovative products. Some may opt to gain some exposure to these higher-risk asset classes with a small investment that makes up a small proportion of their portfolio.
Overall, gaming companies may be very attractive investments to anyone looking for companies with strong growth prospects. However, though looking for dividends will need to shop around to find the businesses that are paying them.