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2 Video Game Stocks to Buy in the Wake of Activision Blizzard's Monster $68 Billion Buyout

Motley Fool - Fri Nov 3, 2023

Microsoft's recent acquisition of Call of Duty maker Activision Blizzard for $68 billion shows that top video game producers are highly prized assets. Leading game companies attract large audiences with their best-selling titles, and these players tend to stick around for the long term, spending money on their favorite games.

The video game industry generates more revenue every year than movies and music combined, and provides ample opportunities for the leaders to deliver shareholder returns. Moreover, as Microsoft just demonstrated, top game companies could become acquisition targets, providing an extra catalyst for investors.

To give you two ideas, here's why you might want to consider buying shares of Take-Two Interactive (NASDAQ: TTWO) and Ubisoft Entertainment (OTC: UBSFF)(OTC: UBSFY).

1. Take-Two Interactive

The industry is projected to reach $467 billion in annual game spending by 2027, according to Statista. Take-Two should be right in the thick of that growth, considering its Grand Theft Auto franchise is one of the best-selling video games of all time, with more than 405 million copies sold. The latest installment of the series has sold 185 million copies since launching in 2013, and with the next installment around the corner, Take-Two is about to start another growth spurt.

Through a combination of new releases and acquisitions, Take-Two has grown its annual revenue by 16% per year over the last 10 years. It has several games set for release that management expects to deliver record financial results in the next few years, which could include a new Grand Theft Auto title. Wall Street analysts anticipate the company's bookings (a non-GAAP measure of revenue) to reach a record $7.9 billion by fiscal 2025 ending in March.

Looking beyond the next two years, mobile gaming is another big opportunity for Take-Two. As mobile devices become more capable in their graphical performance, leading game makers are increasingly investing in this growing market. Take-Two has put its stake in the ground with the $12.7 billion acquisition of Zynga. That might seem like a big bite out of the apple, but the transaction is quite small next to the estimated $173 billion that the mobile gaming market pulls in every year, according to Statista. A combination of new mobile releases and annual cost synergies from the deal should drive profitable growth over the next several years.

The stock is not cheap but could deliver market-beating returns as management begins releasing new titles from its pipeline over the next few years. Using Wall Street's earnings estimate for fiscal 2025, the stock is currently trading at a forward price-to-earnings of 17, which appears fair considering the opportunities ahead.

2. Ubisoft Entertainment

France-based Ubisoft Entertainment might be the most undervalued video game stock right now. The stock has fallen 77% over the last three years. Ubisoft has struggled to keep its bottom line above breakeven, despite maintaining stable annual revenue above $2 billion. However, the stock is poised to rebound as management executes a strategy to double down on its best-selling titles while cutting costs to bolster profitability.

Ubisoft is off to a good start this year. Its biggest franchise, Assassin's Creed, entered the year with a record level of active users ahead of the launch of a new title in the series.

Another popular title, Rainbow Six Siege, is also reporting strong growth this year, as players continue to spend time in the industry's biggest franchises. Strong performance in the company's back-catalog and new releases drove record revenue through the first half of fiscal 2024 ending in March.

Ubisoft sees more growth ahead in the free-to-play game market, which is the most popular category in gaming today with more than 2.5 billion players. Ubisoft is aiming to capture more of these players by launching mobile versions of Rainbow Six, The Division, and Assassin's Creed.

Ubisoft also recently scored the cloud gaming rights to Activision's console and PC titles over the next 15 years. As cloud gaming becomes a more popular path for players to access games without spending a lot of money on gaming hardware, Ubisoft could significantly grow its player base with this opportunity.

Management also has a plan to cut 200 million euros in costs over the next two years to deliver profitable growth. In that context, the stock looks cheap at a price-to-sales ratio of 1.66, where most top video game companies, including Take-Two, are valued at over 4 times trailing sales. All the ingredients are in place for investors to score a nice return over the next few years and beyond.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Take-Two Interactive Software. The Motley Fool has a disclosure policy.

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