In the last few years, the gaming industry has been a good bet for investors. Regardless of what’s happening elsewhere in the real world and in the stock market, gaming companies have been posting record results. Some sections of the gaming industry have performed exceptionally, one of these being iGaming, with online casinos experiencing rapid growth in markets like the US and continuing at already high levels in the UK. These casino brands don’t look like they’re planning to slow down either, as most are offering large bonuses as part of promotions to attract new customers.
But with the rest of the stock market losing steam, it might be reasonable to question whether gaming can keep growing or whether it will get on board the cyclical bandwagon as investors look to liquidate their positions.
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Differentiating the Stock Market From the Economy
All investors need to keep in mind that, while there are a few connections between them, the stock market and the economy are very different beasts. So it is possible for the stock market to rise while the economy doesn’t and vice versa.
It’s also important to remember that investors often get emotional, buying because of general market sentiment being positive and selling when it turns bearish.
So while a company might be valued at $1 billion today, it might drop 1% to $990 million tomorrow because that’s what happened across Wall Street. Yet, the company will own the same assets, have the same customers, and be on target to hit the same revenue and profit targets. This means, therefore, that the company’s intrinsic value did not change over a period of 24 hours, it’s just that the emotions of investors lowered how much people were willing to pay.
It is, for this reason, that value investors like Warren Buffett actually tell people not to pay too much attention to the day-to-day trends in stock prices, since you should be looking to assess a company’s worth using other methods.
Buffett is also regularly quoted as saying “be fearful when others are greedy, and greedy when others are fearful”. What he essentially means by this is that when people are liquidating their entire portfolios due to the fear of short-term losses, long-term value investors can come in and hoover up all the bargains that have been made possible by the suppressed share prices.
General Investor Sentiment vs the Gaming Industry
We can apply this approach to the gaming industry to understand how the underlying businesses will perform against the backdrop of the wider economy and the stock market.
It is probably safe to assume that a universal sell-off of company shares will affect gaming companies. Almost no business is immune from a general bear market, but when we apply Buffett’s philosophy, we can look at this as an opportunity to acquire companies at bargain prices.
We can see clear examples of this back in 2007 and 2008. Electronic Arts was valued at $61.12 per share on October 1, 2007. By November 2008, it had fallen by 69% to just $19.02.
Yet, at this time, demand for video games was growing. The Nintendo Wii and DS were helping to increase the appeal of the medium to just about everyone. Between 2007 and 2008, nominal video game sales (not adjusted for inflation) rose from $61.34 billion to $67.48 billion, a rise of 10%.
Of course, investors were worried about future sales declining as the 2008 recession would continue to bite into 2009 and beyond, but sales were not hit by anywhere close to the 69% drop in EA’s share price.
In fact, when you adjust for inflation, video game sales barely declined at all. In 2009, the industry generated $64.5 billion, and then $65.9 billion in 2010. By 2011, sales recovered and then continued to grow higher and higher.
Even when you look at EA’s revenue alone, the decline was negligible:
- 2007: $3.09 billion
- 2008: $3.67 billion
- 2009: $4.21 billion
- 2010: $3.65 billion
- 2011: $3.59 billion
- 2012: $4.14 billion
In that instance, the general market sentiment was much more of an effect on EA’s share price than its own financial performance or that of the gaming industry as a whole.
Will We See This Again?
As the fiscal policies of major central banks switch from quantitative easing to quantitative tightening, a large stock market correction is likely. In fact, there are signs that this is already happening.
The United States’ S&P 500 has declined by 19% since the beginning of the year, while the tech-heavy NASDAQ Composite is down by almost 29%.
Outside of the US, things aren’t looking quite as bad though. The UK’s FTSE 100 is only down by 1.53% on where it started 2022, while Germany’s DAX is down by 12.73% on the same period.
Of course, a 20-30% decline meets most people’s definitions of a correction, but some analysts believe prices could go even lower as investors switch to bonds and other interest-earning assets.
What Does This Mean for Gaming?
It’s unlikely that the gaming industry is going to be immune to declines in share prices but, as we’ve seen, that doesn’t matter. It continued to perform well during the last global recession and in the 14 years that have passed since, companies have diversified their offerings and found new ways to generate more income from their players.
Therefore, we can confidently assume that the industry is in a stronger position than it was back then, has higher revenues, and is likely to continue to grow in the long term.
With that in mind, investors looking at the gaming industry could see any decline in share prices as a buying opportunity rather than a reason to panic.
Of course, everyone is different and has their own financial needs and appetite to risk. So it makes good sense to do your own research and seek the advice of a qualified financial advisor before you make any decisions.
That said, Warren Buffett’s philosophy has remained effective for decades and its level-headed rational approach could mean the gaming industry looks attractive to investors for the coming years.