Video game company stocks have been lagging this year despite the AI-driven tech stock boom.
Electronic Arts, Roblox Corporation and Nintendo have all only gained between 4-6% year to date, and Netease and Ubisoft have slid 15% and 46% respectively compared to the S&P 500 which has grown 20% this year.
When the pandemic hit and millions of consumers flocked to video games for their at-home entertainment, video game stocks were outperforming the S&P 500 similarly to some of today’s magnificent 7 tech stocks like Microsoft and Amazon. Some stocks like Tencent even saw percent gains which soared past Microsoft and Amazon in early 2021 due to a combination of COVID’s effects and the enormous success of its recently released titles like Valorant.
But since then, video game stocks have under-performed due to industry changes like the rise in popularity of smaller game studios and titles as well as declining interest since the end of pandemic lock-downs. Hype around AI which fueled the tech stock boom also has not yet benefited video game stocks despite the technology’s potential to revolutionize the sector by streamlining game development time and costs.
Swiss lawyer Caspar Hunn has ridden the boom and bust of game stocks to virtually no gain. He began buying positions in video game stocks right before COVID through the ESPO ETF by Van Eyck which tracks gaming stocks. “During COVID and right after, I just kept buying. Everything that went down, I just kept and held and waited it out,” Hunn said. He saw his position double from around $40 per share to $80 during pandemic lockdowns, but he held his position through the slide back down to $40 which occurred as the pandemic waned.
Hunn would buy dips in the share price, investing around $7,000 total, and he still holds the ETF to this day. Nearly 5 years after he began investing in the gaming ETF, Hunn’s position is only up slightly from where he started. “It went up and down over the last 4 years, and I think right now it’s up a little bit, at least versus pre-COVID levels,” he said.
The trend of underperformance which began with the end of the pandemic was then exacerbated by changes in the gaming industry. As casual gamers brought in by COVID lockdowns began to let their consoles and gaming PCs collect dust, those who continued to play games began to take issue with a lack of innovation from large studios and publishers. In the industry, the games published by these studios are referred to as triple-A or AAA.
“Video game spending has been kind of weak, and you can guess why that is, but COVID was 4 years ago, so you can’t keep blaming that for difficult comparisons,” said James Heaney, a stock analyst at Jefferies LLC.
As a consequence of their dissatisfaction, more and more gamers turned to “indie” video games, which are smaller scale titles developed and published by independent studios. These games tend to be more innovative and creative because they cost much less to develop and can afford to take risks. Some indie games like Among Us, Palworld, Lethal Company and Helldivers 2 saw enormous viral success which fueled game sales that outpaced triple-A games from larger studios which had cost far more to develop, advertise and publish.
Three months into 2024, 5 of the top 10 highest grossing games on Steam, the largest digital video game distributor for PCs, were all indie games, including the top 2 highest grossing games. At the time, Palworld had generated $405 million in sales for the number one slot, followed by Helldivers 2 which generated $236 million in sales. The third position was occupied by a triple-A game, Baldur’s Gate 3, which had generated a comparably paltry $85 million in sales for that year. In 2023, indie game sales accounted for 31% of all revenue generated on Steam, up from 25% in 2018.
“I don’t want to pick on Call of Duty, but I feel like they don’t change the titles,” said Felix Wang, partner and managing director at the market research company Hedgeye. “Unless there is something materially new out of these triple-A games where people want to get the newest versions and spend more money on them, at some point people are gonna realize it’s getting kind of boring, and that is where the opportunity comes for these indie games.”
The market forces which drove down video game stock prices did not see any pushback from the hype surrounding AI. Investors believe AI has the potential to drive enormous increases in efficiency and profitability, but it seems many do not yet see the vision for its impact on the video game industry. It may only be a matter of time, however, until the hype fueling other tech stock booms spreads to the gaming sector.
Generative AI has enormous potential to reduce video game development time and costs, especially for large studios with the resources to use the technology at scale. AI could help developers create environments, write story and dialogue, stand in for voice acting and generate background music. It could also assist in the quality assurance phase of development, helping discover bugs and suggesting improvements to code.
In these ways, AI could cheapen and accelerate game publishing timelines, thereby making development less risky and resource intensive. This would encourage innovation, helping alleviate consumer gripes about triple-A games, and it would lead to more releases which would generate more revenue.
Despite the anemic performance of video game stocks over the past few years, the industry is still growing, and it has great potential. The vast majority of video game stock analysts recommend buying, or at worst holding, stock even for companies like Electronic Arts and Take-Two Interactive which have performed meekly this year.
In the near term, highly anticipated game releases for the end of this year and throughout fiscal year 2025, such as Grand Theft Auto 6 and Call of Duty: Black Ops 6, are sure to drive the stock prices of their developers up. Over the next few years, AI could cause a surge in video game stock prices as well.