At the start of 2023, the DFC Intelligence Video Game Stock Index was launched. The goal is to track how well the video game industry is doing in comparison to other industries. In analyzing the first year of data, video game stocks actually did not do as bad as overall tech stocks and stocks of larger conglomerates.
Pure-Play Video Game Companies Outperform
The initial DFC index consists of 33 public companies representative of the high-end global video game industry. These companies are a mixture of pure-play video game publishers, hardware manufacturers, and global conglomerates.
Stock prices were down across the board but pure-play video game companies fared better than most. Setting the index at 100 for January 2022, pure-play video game companies were trading at an average of 82.8 at the start of 2023. Obviously, that is a significant investment decline. However, it is a better performance in other segments.
At the start of 2023, the overall NASDAQ index was trading at 65.6, down 34.4% from January 2022. In the DFC Video Game Stock Index, companies defined as Conglomerates were trading at 59, down 41%. Hardware companies were also at 59.
Is the Consolidation Trend Over?
The performance of companies in the video game space is a possible indicator of a larger trend of specialization that tends to go against the early 2022 trend of consolidation. At the start of 2022, Take-Two Interactive announced it was acquiring Zynga for close to $13 billion, Sony acquired Bungie for $3.6 billion and Microsoft announced its intention to buy Activision Blizzard. There was also the Embracer Group which continued its acquisition spree by acquiring board game company Asmodee for $3 billion.
It is worth noting that among companies in the DFC Index, Embracer Group and Take-Two Interactive were among the worst performers. In part this can be seen as a growing realization that high-end entertainment products are a tricky business. There are often negative synergies from trying to manage a bulky portfolio.
Consolidation is an end goal for many companies but there could be a shortage of buyers. Smart money is starting to realize it is not easy to simply buy into the video game space.
It is also worth noting that after big layoff announcements, the stock price of many conglomerate companies has significantly risen over the past few weeks. In other words, the current trend is to reward downsizing, not acquisition.
Quality Over Quantity
The recent success of companies like Electronic Arts and Activision Blizzard has come from trimming product portfolios and concentrating on the big hits. In contrast, a company like Ubisoft continues to have a history of trying to publish as many different products as possible. In the DFC Index, Ubisoft was down to 60.7 for 2022 versus only an 8.5% decline for EA at 91.5. (Of course, Activision was up because of the potential Microsoft acquisition).
Even in today’s society, video games are often seen as a product for children or socially delayed adults. The reality is these are among the most sophisticated entertainment products ever and they have a vast demographic appeal. There are many subsegments and niches and each requires a solid understanding of the targeted consumer.
Conglomerates that think they can buy their way into the video game space are almost always sorely disappointed. Over the years, larger companies in the game space have learned success requires intense focus. When video games are a side strategic venture of a larger company failure is almost always the result.
Pure-play video game companies have significant room for growth. These companies received a great deal of attention during the peak of COVID in 2020 and early 2021. Like all stocks, they declined in 2022. However, growth prospects look solid for the industry and there are some attractive video game stocks for 2023.
The DFC Intelligence Video Game Stock Portfolio
At the start of 2023, DFC started the Video Game Stock Portfolio. This consists of companies we expect to be strong performers
The portfolio is adjusted on a regular basis and focuses primarily on holding for long-term growth. New stocks may be added as appropriate.
Stay tuned and look out for the new DFC Intelligence 2023 forecast. We expect some pleasant surprises for the industry!