The video game industry has come a long way from its roots, gobbling up spare change slotted into arcade machines. In 2024, the gaming market is expected to reach a massive $282.3 billion, and it's still growing.
By 2027, forecasts predict video games will generate $363.2 billion. To achieve this size, gaming businesses have evolved to generate sales in multiple ways.
Finding winning gaming stocks means identifying companies that have mastered the contemporary revenue landscape. Among the choices, these three businesses stand out: Electronic Arts(NASDAQ: EA), Take-Two Interactive Software(NASDAQ: TTWO), and Nintendo(OTC: NTDOY).
Here's why these gaming stocks are worth buying now and holding onto as long-term investments.
1. Electronic Arts
Electronic Arts possesses several qualities that make it a compelling investment. For starters, it's renowned for its sports games.
This area of its business is so strong, its soccer franchise is flourishing despite severing a nearly 30-year relationship with soccer giant FIFA. In its fiscal third quarter, ended Dec. 31, 2023, EA's post-FIFA soccer games saw a 7% increase in sales even though the prior year got a boost from the World Cup.
Another factor is EA's success with live services. This is additional digital content, released after a game is launched, that consumers can buy to enhance the base game.
EA's live services sales reached a record $1.7 billion of the company's $2.4 billion in fiscal third-quarter net bookings, which is the company's revenue after adjustments. Live services income represented 73% of EA's net bookings over the trailing 12 months.
Live services content is less costly to produce than video games, helping to boost EA's profit margins. As a result, the company's gross margin rose to 72.8% in fiscal Q3, up from 69.8% in the prior year.
EA also generates strong free cash flow (FCF). Over the past 12 months, FCF nearly doubled year over year to $2.2 billion.
These factors make EA stock a good investment, especially since shares have dropped from a 52-week high of $144.53 reached in February. With its next earnings release approaching on May 7, now is a good time to buy.
2. Take-Two Interactive
Take-Two's strength lies in its pantheon of popular titles, most notably its Grand Theft Auto franchise. In March, the firm added to this strength with the acquisition of Gearbox Entertainment, the organization responsible for the popular Borderlands series, which will have a movie based on the franchise debuting in August.
Take-Two also acquired mobile gaming company Zynga in 2022. This supercharged Take-Two's mobile sales, which, before the acquisition, totaled $403.4 million in its 2022 fiscal year, ended March 31, 2022.
Through nine months of fiscal 2024, Take-Two's mobile income represented $2 billion of the company's $4 billion in sales. Take-Two plans to expand live services across Zynga's games to grow its mobile revenue.
The company's 2025 fiscal year began in April, the year CEO Strauss Zelnick promised Take-Two would "enter our next phase of growth." A slate of new games is expected to drive this, including the highly anticipated Grand Theft Auto VI title to be released next year.
But Take-Two shares dropped recently on fears of Grand Theft Auto VI launch delays. This creates a buying opportunity for investors with a long-term mindset.
The consensus among Wall Street analysts is a median stock price target of $179.27 with an overweight rating. These factors make now a good time to pick up shares.
3. Nintendo
Venerable Nintendo's ability to thrive despite the vagaries of the video game market makes it an attractive investment. Nintendo's success is thanks to beloved franchises, such as its Super Mario brand, as well as its consistent ability to produce hit platforms.
Currently, that platform is the Nintendo Switch, which is still going strong after seven years on the market. The console contributed to Nintendo's 8% year-over-year sales growth to 1.4 trillion yen in its fiscal Q3, ended Dec. 31, 2023.
Nintendo management described Switch's ongoing success as entering "uncharted territory" because it's the company's first console to maintain high sales volume into the seventh year of its product life cycle.
Nintendo's software sales are also a bright spot. Revenue from digital games rose 12% year over year to 346.4 billion yen in the first nine months of fiscal 2024. Digital income is now approaching half of the Switch's total software sales.
This leads to a higher gross margin since digital products lack the costs of manufacturing and shipping a physical game cartridge. Consequently, through three quarters, Nintendo's gross profit rose from 53.9% in the prior year to 55.8% in fiscal 2024.
Not only is Nintendo's gaming business going strong, the company's income from its intellectual properties rose 93% year over year to 75.2 billion yen during the first nine months of fiscal 2024. This outsized growth was thanks to the success of last year's hit Super Mario Bros. movie.
Nintendo is now working on a movie based on its popular Legend of Zelda franchise, and next year it will open a Super Nintendo World theme park in Florida. Eventually, the company's successor to its Switch platform will arrive as well. In the meantime, investors can benefit from Nintendo's dividend, currently yielding a robust 3%.
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Robert Izquierdo has positions in Nintendo and Take-Two Interactive Software. The Motley Fool has positions in and recommends Take-Two Interactive Software. The Motley Fool recommends Electronic Arts and Nintendo. The Motley Fool has a disclosure policy.
