February 4, 2023

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Video Games: Industry Slowdown Doesn’t Mean It’s Game Over

“Go touch some grass” is a popular online insult aimed at over-the-top gamers. Unfortunately for video game companies, that’s exactly what kids are doing. After a pandemic-driven spending spurt, the industry has slowed.

After the restrictions were over, players abandoned their keyboards. According to gaming data company Newzoo, global spending on video game software is expected to fall by over 4 percent to $184 billion this year. That’s a far cry from 2020’s 23 percent surge.

Recent company results offer little hope that the forecast could be wrong. Activision Blizzard, which agreed to be acquired by Microsoft for about $69 billion, reported a 14 percent drop in revenue and an even bigger drop in profit for the third quarter. Both Electronic Arts and Take-Two Interactive lowered their full-year revenue guidance.

Roblox experienced a sharp deceleration in revenue growth in the most recent quarter. The stock, which went public via a direct listing at around $45 per share, is now below $28. It’s trading at 9x sales, up from 50x 18 months ago.

Do not press the Game Over button yet. Video game companies have to grapple with harsh comparisons after two years of banners. A lack of must-have games this year and a strong US dollar didn’t help. Electronic Arts, which gets more than half of its sales outside the US, said it would pocket $200 million from currency troubles.

For investors, the recent fall in share prices and valuations presents an opportunity to separate the losers from the leaders. Newzoo predicts the industry will return to growth over the next year and will generate over $211 billion in revenue by 2025. Game publishers focused on building communities remain a good choice. Roblox, whose game engine also functions as a social network, fits into the picture.

Share prices have adjusted to demand and settled back down to normal levels. The popularity of gambling won’t end just because players get outside every once in a while.

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