Could video games take your portfolio to the next level?
The video games industry has seen more change in recent times than almost any other. Over the past 15 years, gaming technology has “moved very quickly, the behaviours and culture have grown and expanded exponentially, and there has been a constant stream of changes that has made the industry exciting”, says Greg Weller, head of gaming partnerships at Generation Media. Some of the changes have been positive. The industry has become “an established, mainstream constituent of the entertainment industry”, with an estimated 3.6 billion people around the world now playing games in some form, says Gavin Smith, a senior commercial banker at Arbuthnot Latham.
However, “rising development costs, greater regulatory scrutiny and the concentration of player attention around a handful of major franchises could end up limiting that growth”, says Smith. Artificial intelligence, too, clearly has “significant transformative power”, though it’s too early to say whether this will be good for the sector.
The industry’s reputation for being “recession-resistant” has already been tested, with companies cutting around 45,000 jobs since 2022, as Adam Smart, global director of products for gaming at AppsFlyer, points out. Still, the opportunities outweigh the risks, making it a great time to invest. Consultant BCG estimates the market will grow by about 6% a year, reaching a value of $350 billion by 2030. Other estimates put the growth rate even higher.
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Browser-based video games are the future
The big growth has come from games that you can play on your mobile phone or through your web browser as they are “really easy for virtually anyone to play” without having to splash out on expensive gaming hardware, says Matthew Dolgin, a senior equity analyst at Morningstar. Many of them also have a social element or are integrated into social media, which is bringing more and more people into gaming, including many of those who wouldn’t otherwise have ever considered playing video games.
At the same time, the balance of power between mobile companies and the app stores has shifted. Until recently, developers just accepted that 30% or more of their revenue would go to Google Play or the Apple Store, says Stein Janssen, chief operating officer at browser-based games website Poki. But this has been increasingly challenged in the courts and in legislation. Apple has faced an investigation from the European Commission as well as lawsuits. Janssen expects this pressure to lead to a reduction in the cut that Google and Apple are able to take from sales of mobile games.
Indeed, many mobile games companies are starting to bypass Google and Apple completely by “starting their own stores for people to download games or buy in-game items”. Others are switching from mobile games funded by payments (either up front or in-app) to ones that are free, but rely on advertising revenue. Browser-based games are the future, says Janssen, as they can be played immediately, rather than waiting for a download.
Shifts in the big-budget video games subsector
Mobile and browser gaming may be the fastest-growing part of the industry, but the big budget games (or the AAA games as they are sometimes known) are still doing well. Revenue for this subsector will grow by a still respectable 4.7% a year for the next four to five years, according to BCG. Whenever “there are truly engaging games on the market new people start playing, and every year we see new generations of gamers log on”, says Andrew Bowell, CEO of immersive entertainment studio Iconic Interactive. Throw in the older generations who are already at home with games and the industry “should continue to grow”.
At the same time, outside expanding areas such as Asia, much of the growth is less about attracting new players and more about how revenue is collected – or in other words, about getting existing players to spend more, says Noam Korbl, CFO at PropFirms. Large parts of the industry have “moved from selling a boxed product once to charging for continued access, cosmetics, season passes and subscriptions”. Recurring spending from an existing player base is “far more predictable than hoping a single release performs well in its launch quarter, and investors tend to pay more for predictability than for creativity”.
Another big trend affecting AAA gaming is what Smart calls “platform convergence”, where the “old lines between console, PC and mobile blur as cross-platform play and cloud gaming let the same title reach players everywhere”. This means that studios and publishers now receive “diversified revenue streams”. This doesn’t completely insulate them from the financial consequences of a flop, but it does mean that a shock in one segment, system or region “doesn’t necessarily sink the whole industry”.
Video games conquer films and TV
(Image credit: Rodin Eckenroth/Getty Images)
Modern games have moved away from being just single products to being “franchises made up of a wide-ranging bundle of intellectual properties, with distinctive characters and even music”, all of which “lend themselves to broader application than just computer games”, says Aminder Khatkar, a partner at Brandsmiths. Such intellectual property (IP) can (and has) been exploited for lots of different things, including experiential events, but the most obvious application is in film and TV. There is a “definite convergence”, says Khatkar, between gaming and TV and movies.
The conversion of characters and franchises that have their roots in gaming into films and TV shows represents “one of the biggest opportunities across the media industry”, says Smith. Recent adaptations such as drama series The Last of Us and Fallout have shown that “gaming IP can attract substantial audiences beyond gaming itself”. Successful gaming franchises have “established fan bases, global reach, and richly developed worlds that sustain audience engagement across a range of formats”. In some cases, gaming IP is becoming more valuable than traditional film or television enterprises. Nintendo, for example, is expanding franchises such as Pokémon, Zelda and Super Mario into films, merchandise and theme parks.
The number of games being adapted into TV shows or films is increasing, says Stefan Seidel, a professor of information systems at the University of Cologne. Well over 200 adaptations have been commissioned since 2019, according to market research firm Ampere Analysis. And when an adaptation succeeds, “it lifts the games that already exist”. After the Fallout television series, for example, “the years-old Fallout 4 video game climbed back into the top five of the US sales chart, and daily players of the older games stayed far above pre-series levels for months”.
Interestingly, the circular effect is bigger for TV adaptations than films. The typical TV show increases the number of people playing a particular title by more than 200%, compared with 48% for films, according to Ampere’s research. Still, even the boost from film is substantial and far greater than the increase in numbers that comes from updates and new downloadable content. The games industry is starting to become a much bigger and lucrative version of the toy industry, says Heather Delaney of Gallium Ventures, where TV shows based on the toys have long boosted sales.
Will virtual reality live on?
Delaney is a bit cooler on virtual reality (VR), which many previously saw as the wave of the future. Indeed, Facebook changed its name to Meta in October 2021 due to its belief that the future lay in what it called a “Metaverse” of people communicating (and playing) through virtual-reality headsets. Recently even Meta has been pivoting away from both the Metaverse and VR in general, closing three of its VR studios and laying off 10% of staff in the area, in favour of “adaptive reality” glasses that merge digital content with the physical environment. VR turned out to have too many limitations when it comes to gaming, not least the feeling of isolation while playing.
(Image credit: TOBIAS SCHWARZ/AFP via Getty Images)
Meta’s “gradual retreat” from VR “probably tells us something about where the wider subsector is heading”, says Smart. Enthusiasm for VR came at a time when people “were stuck at home” during the Covid pandemic and looking for escapism. Still, VR is unlikely to entirely disappear as it has attracted a “passionate core audience” and when done well can provide “one of the most exciting experiences in gaming”. The launch of new hardware, such as Valve’s Steam Frame, may attract a new audience to VR.
Others are more optimistic. Meta may have cut back its investment on VR, but it has not completely abandoned it and it is still trying to push the technology, albeit in a way that is less high-profile, says Khatkar. Indeed, Meta’s partial retreat shows the sector no longer needs to be “artificially propped up” by big tech firms but is strong enough to be left to individual companies producing software that can meet the demand, says Matt Celia of Light Sail VR. More than 20 million Meta Quest headsets have now been sold, with one in four teenagers in the US owning a VR headset, and a new product upgrade is likely in the near future. More than a million people use the headsets every day, “which is relatively high for an emerging technology”. Several independent studios and apps have started to make money from VR games.
AI won’t kill the video games industry
One of the biggest questions hanging over the industry is the impact of AI. Some of the fears are clearly justified. It’s hard to deny that the demand for processing power and chips created by AI “has pushed up the cost of consoles and computer equipment”, says Sean Kealy, VP of equity research at Panmure Liberum. But fears that AI will allow anyone to easily create games at zero cost, making games companies redundant, are also exaggerated – at least for the foreseeable future. AI “is not capable of producing a video game in and of itself, by itself, straight away”.
The release of footage generated by Google’s cutting-edge AI world-building tool Project Genie, which caused the share price of many developers to fall when it was released in February, demonstrates the limitations of modern AI. “Video generation struggles to maintain coherent frames over more than a few minutes, with the entire world behind you different from the one that you walked through just seconds previously,” says Kealy. He also points out that there are open questions around copyright, not just in terms of the use of copyrighted content in AI, but also in terms of copyrighting AI-generated content.
There’s a long way to go before the human element in games creation can be bypassed completely, agrees Seidel. The more likely outcome is that AI will be used in something like the same way as the industry has over the past few decades used “procedural generation” – where game elements such as the appearance of monsters and treasure are randomly created. After a lot of trial and error, games companies found this worked best when it was accompanied by designers “who kept evaluating and adjusting what the tools produced, and who continued to design the parts of the world that mattered most by hand”.
At the same time, AI could help the industry in two main ways. Firstly, it will help keep costs under control. With the typical cost of making a game having “risen over time from $50 million to $500 million”, anything that helps the industry “take a leaner approach to game development” will be good for developers, says Bowell. There could be particularly big time-saving efficiency gains when it comes to creating characters, environments and texturing. The use of large language models will also make the interactions between gamers and computer-controlled characters (NPCs) more “non-scripted and dynamic, which in turn will make games more interesting and replayable”, says Massimiliano Calamai, games director at Smallthing Studios.
Over time, the positive and negative aspects of the AI revolution will make “distinctive intellectual property and strong distribution even more valuable”, says Marc Fernandez, the chief strategy officer at Neurologyca, which tries to produce AI that better understands context. The big winners will be studios with “valuable IP, engaged communities, and the ability to turn adaptive, personalised worlds into long-term player engagement”.
We look at some of the most promising investments to profit from all these trends below.
The best gaming investments to buy now
(Image credit: CHRIS DELMAS/AFP via Getty Images)
Take-Two Interactive (Nasdaq: TTWO) owns Rockstar Studios, the company behind the successful Grand Theft Auto franchise. Gamers are eagerly anticipating GTA VI, the latest instalment in the franchise. It is “an example of exceptional intellectual property that can help sell software, move hardware and command the culture”, says Greg Weller of Generation Media. The company also owns games studio 2K, which has several successful franchises, and mobile developer Zygna, which allows it to also benefit from the boom in mobile gaming. Take-Two has a strong record, with revenue nearly doubling between 2001 and 2006. The stock trades at a reasonable 21 times expected 2028 earnings.
If Take-Two is a growth story, then Ubisoft (Paris: UBI) is about value. The company has faced many challenges and has struggled with sales and profitability, says Matthew Dolgin of Morningstar. But with rival Electronic Arts now a private company, Ubisoft is the best option for those who want to invest in a traditional games company with multiple large franchises, which include the Assassin’s Creed and Far Cry series. Ubisoft looks cheap on multiple valuation metrics, trading at less than half the estimated value of its net assets.
CD Projekt Red (Warsaw: CDR) is an example of just how volatile the fortunes of games companies can be. It has struggled since the release of a hotly anticipated game resulted in mixed reviews. Its sales and share price are now well below pandemic peaks. Development delays have also been a problem. However, the company still makes money from licensing the brand rights to its hit series of Witcher games and is preparing several big releases in the next few years, including Witcher 4 and Cyberpunk 2077 II, which should substantially boost revenues. The stock trades at 25 times estimated 2027 earnings.
Sony (Tokyo: 6758) is not a pure play as it only makes about a third of its sales from games and related services, with music and entertainment systems also being major sources of revenue. The importance of gaming to the firm is only set to rise, however, following its decision to partially spin off its financial services business. It sells games hardware, most notably the PlayStation (which includes a VR headset), as well as its own software. Some of its game franchises, most notably the post-apocalyptic drama The Last of Us, have also become successful TV series. The stock trades at 16 times expected 2028 earnings.
(Image credit: Patrick T. Fallon/Bloomberg via Getty Images)
Nintendo (Tokyo: 7974) is a games company with a long pedigree. It still produces a regular stream of new titles and hardware (most recently the handheld Switch 2) and it has also been finding new sources of revenue. Nintendo has been working harder to make money from its major franchises outside gaming. The Super Mario Galaxy Movie, for example, has already made more than $1 billion at the box office and a major new film based on The Legend of Zelda series is due out next spring. The stock trades at 21.5 times projected 2028 earnings.
One smaller UK-listed company worth looking at is Everplay (Aim: EVPL). Everplay has three businesses, including German developer Astragon and Storytoys, which produces educational apps for children between the ages of two and eight using licensed IP. The big business is Team 17, which publishes independent games such as Worms and Wardogs. The latter recently sold a million copies on the first day of its release. Everplay has an impressive record of monetising the IP of the developers that it works for, says Sean Kealy of Panmure Liberum. Revenues have more than doubled between 2020 and 2025 and the stock trades at only 10.3 times projected 2027 earnings.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
