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Buying the E-Sports Boom

John Blank

The eight-company-strong Zacks Toys, Games & Hobbies industry is hot.

Its Zacks Industry Rank has risen to a stellar #18 out of 254 niches as the stock market enters the summer month of August 2019.

However, that top Zacks Industry Rank only popped higher in the last three weeks.

That is one tell.

This current industry rise is about a batch of super-strong Q2 earnings reports.

What is this boom really about?

This earnings strength is about a more durable rise of worldwide consumer demand for interactive entertainment software. The top four firms here are all major players in that space.

The interactive entertainment industry generated $91 billion in 2016 global revenues through video games, E-Sports and gaming video content, according to a 2017 report by covering analyst firm, SuperData.

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According to them, 2018 was the biggest year for digital games and interactive entertainment.

Ever.

The new cross-platform digital games landscape and the continued growth of segments -- like E-Sports, gaming video content, and virtual reality -- have led to a dynamic market.

  • Free-to-play titles amassed 80% of digital games revenue in 2018. Asian mobile games helped the region earn 62% of global free-to-play revenue,

  • Premium games ($17.8B in 2018 revenues) still performed well in Western markets. North America and Europe generated 80% of premium games revenue.

This E-games boom shows no signs of slowing down. Interactive games industry revenue grew another +13% in 2018,as a red-hot game “Fortnite” disrupted the status quo. 

The battle royale “Fortnite” title generated the most annual revenue of any game in history and popularized gaming video content (GVC) among mainstream audiences.

“Fortnite” singlehandedly grossed a $3B profit for game developer Epic Games in 2018 and reportedly now has 200 million players.

While game developer Epic Games is a private company, there were plenty of public companies that benefited from the craze.

  • The most direct public “Fortnite” winner is China’s Tencent, which owns a 40% stake in Epic.

  • In addition to Tencent, toy company Funko Inc. landed a deal with Epic in July 2018 to produce “Fortnite”-branded toys and collectibles.

  • That news sent their stock surging. Funko shares finished the year up +93%.

However, the good share price industry-wide could be all priced in.

There are no solid Zacks Value plays to be had. The forward 12-month Price to Earnings ratio for the Toys, Games & Hobbies industry is at 17.9.

To be bullish, you must go ‘all-in’ on the forward growth story.

To conclude, I list the four top Zacks Ranked stocks—

These are all large-cap stocks.

(1) Hasbro (HAS)

This is a Zacks #1 Rank (STRONG BUY). The Zacks Growth Score is B. But the forward P/E is a nosebleed 26.8. The PEG ratio is 2.5. That gives up a Zacks Value score of D.

At $124 a share, the market cap is $15.9 billion.

Hasbro, Inc. is a global play and entertainment company committed to creating the World's Best Play Experiences.

From toys and games to television, movies, digital gaming and consumer products, Hasbro offers a variety of ways for audiences to experience its iconic brands, including NERF, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH, MONOPOLY, LITTLEST PET SHOP and MAGIC: THE GATHERING, as well as premier partner brands.

Through Hasbro Studios and its film labels, Allspark Pictures and Allspark Animation, the company is building its brands globally through great storytelling and content on all screens.

Hasbro is committed to making the world a better place for children and their families through corporate social responsibility and philanthropy.

(2) Electronic Arts (EA)

This is a Zacks #2 Rank (BUY). And the Zacks Growth Score is B. The forward P/E is high at 19.4. The PEG ratio is 1.2, which is solid. That gives up an average Zacks Value score of C.

At $86 a share, the market cap is $26.4 billion.

Electronic Arts Inc. is a leading global interactive entertainment software company.

EA delivers games, content and online services for Internet-connected consoles, personal computers, mobile phones and tablets. EA has more than 300 million registered competitors around the world.

Headquartered in Redwood City, California, EA is recognized for a portfolio of critically acclaimed, high-quality blockbuster brands such as The Sims, Madden NFL, EA SPORTS FIFA, Battlefield, Dragon Age and Plants vs. Zombies.

(3) Nintendo (NTDOY)

This is a Zacks #2 Rank (BUY). And the Zacks Growth Score is A. But the forward P/E is high at 20.2. That gives up a Zacks Value score of C.

With a Zacks Momentum score of B, the overall Zacks VGM score of A is the “Best-in-Class.”

At $45 a share, the market cap is $44.3 billion.

Nintendo Ltd. is the acknowledged worldwide leader in the creation of interactive entertainment.

Nintendo has created such industry icons as Mario and Donkey Kong and launched franchises like The Legend of Zelda and Pokémon.

Nintendo manufactures and markets hardware and software for its popular home video game systems, including Nintendo 64 and Game Boy -- the world's best-selling video game system.

(4) Take-Two Interactive Software (TTWO)

This is a Zacks #2 Rank (BUY). The Zacks Growth Score is average at C. But the forward P/E is high at 28.4. That gives up a PEG score of 2.5 and a very poor Zacks Value score of F.

At $121 a share, the market cap is $14.0 billion.

Take-Two Interactive Software, Inc. is a leading developer, publisher and marketer of interactive entertainment for consumers around the globe.

The company develops and publishes products principally through its two wholly-owned labels Rockstar Games and 2K.

Their products are designed for console systems and personal computers, including smartphones and tablets, and are delivered through physical retail, digital download, online platforms and cloud streaming services.

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