Video Game Stocks: More Than Just a Game

The video game industry is quite large. It incorporates other sector’s elements such as semiconductors, computing, advertising and much more. In this episode we explore the makeup of video game sector and how it impacts financial markets. Sam Martinelli, Staff Editor at The Fly, joins Cassidy Clement to discuss.

Summary – Cents of Security Podcasts Ep. 91

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Cents of Security Podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers, and today I’m your host for the podcast. Our guest is Sam Martinelli, Staff Editor at The Fly. The video game industry is quite large—it incorporates other sectors and elements such as semiconductors, computing, advertising, and much more. In this episode, we’re going to explore the makeup of the video game sector and how it impacts financial markets. Welcome to the program, Sam. 

Sam Martinelli 

Thanks for having me. 

Cassidy Clement 

Sure. So, since this is your first episode, why don’t you tell the listeners a little bit about your background in the industry? 

Sam Martinelli 

Sure. I’ve been working at The Fly for about 10 years. The way we do things is everyone has to cover a little bit of everything. But some years down the line—I’d say 2017 or 2018—I suggested to my editor that we expand our coverage of the video game industry, given the growth it was experiencing and lots of different trends that I think people want to know about. 
It certainly helps that video gaming has been a personal interest of mine for basically my entire life, so I do bring some of that background to my writing, to my work. 

Cassidy Clement 

Yeah, great to hear. I was part of the youth when the Wii came out and really rocked my world. Animal Crossing and Nintendo Switch kept my social life alive during the pandemic, so I totally understand. But within the past several years, there’s been a surge in the video game sector—the gaming sector—and that’s why I wanted to touch on it today. 
The sector has been around for many decades, but now more stocks or companies are coming into the limelight, especially in the financial news market. 
What are some companies that are public or maybe are part of a public company that our listeners may be familiar with? 

Sam Martinelli 

I always want to start, when it comes to video games, with hardware—Nintendo, Sony (which makes PlayStation), and Microsoft (which makes Xbox). And now Microsoft, over the past—I’d say—five or six years, has really tried to expand its software offerings through acquisitions. 

Obviously, acquiring Activision Blizzard—that’s the biggest one. That’s one of the biggest M&A deals in recorded history. But they also acquired Bethesda, which makes Elder Scrolls, Fallout, Doom—so they own a lot of that. So, those are the first three stocks I’d like to mention. 

In terms of third-party publishers: Electronic Arts—obviously everyone knows EA Sports—but they also make games like Mass Effect and Dragon Age. Take-Two: they do their own sports games, NBA 2K, WWE 2K, but their biggest asset is Rockstar Games. So Grand Theft Auto VI is expected to come out this year—that’s Take-Two. If you want to know how you can invest in the company that makes Grand Theft Auto VI, which potentially could be a massive hit (everyone’s expecting it to be), that’s Take-Two. 

Warner Bros. Discovery has actually been a company that’s been on the radar for the last few years—not because they do anything particularly original, but because of the licenses they own. Hogwarts Legacy, a Harry Potter game, came out a couple years ago and was a monster hit. They also own Batman and all the DC Comics. They have a Wonder Woman game in the works—though reportedly that game is under some development difficulties. So we’ll see what happens there. 

Then you have—after that, I’d say look internationally—Ubisoft, based in France. They make Assassin’s Creed, Far Cry, Prince of Persia. They’re in flux right now. They haven’t had a big hit game in some time and have had some big revenue drops over the last few quarters. And there’s been some reporting that they might go do a take-private deal with Tencent involved. So I’d say keep an eye on that. 

Other big third-party publishers—a lot of them are in Japan: Capcom, Square Enix, Sega, Bandai Namco. They make Elden Ring. So if you’ve heard about people playing Elden Ring, that’s a Bandai Namco game. 

And one company in Poland I want to highlight: CD Projekt (I might spell this “Projekt”)—they make The Witcher games. They make Cyberpunk 2077. But they also own a PC gaming store called GOG.com. So that’s a big one. 

Outside of that, I’d say look to China. Tencent and NetEase are two of the biggest video game companies on the planet—mostly because of their investments in mobile gaming. But Tencent also owns Riot, which makes League of Legends. They also have a 40% stake in Epic Games, which makes Fortnite. 
NetEase has been doing partnerships with Blizzard for years with Diablo and World of Warcraft in China, as well as Marvel Rivals, a big Marvel Comics-based shooter that NetEase has been a part of. 

So I would say those. And the last one I’ll mention is Roblox—which I’m sure everyone who has kids has had to spend hundreds of dollars on, and they don’t know where it’s going every year on Roblox. So it’s a game creation kit that seems to be really popular with young kids. 

So I’d say those are—I know I named a lot of stocks there, a lot of companies—but those are the big ones I have my eye on. 

Cassidy Clement 

Yeah, it’s funny that you mention—we’ll say—the “youngins” in the market, because that’s usually how a lot of these companies initially get their exposure. I was a Nintendo kid, and now as a young adult, all of my friends—myself included—we’re still buying games, or buying retro packs or downloadable content. It’s still very fun, but the market is so much larger. 

And all of these are coming into—we’ll say—almost behemoth-sized financials as well. This isn’t necessarily someone just having a game store in the neighborhood anymore and going, “Oh, this cool game came out, let’s see how it goes.” 
It’s a lot larger than that, and there’s a lot more boots on the ground too, as well as people and professionals that have these skills. So this sector is bleeding into several other places. 

So, from your experience and your research, does this sector’s performance come from within, or does it hinge on a lot of other sectors—thus making it not as independent anymore? 
And what I mean by that is: video games today—and the sector today—have integrations with AI, semiconductors, and software development. 
So, is a lot of this going outside of the video game market to fulfill these needs, or is it mainly in-house? 

Sam Martinelli 

It’s a little bit of both. So obviously, every generation of consoles, players are expecting better technology—faster load times, more smooth frame rates. And of course, you’re going to need to rely on AMD and Nvidia and Intel to make the chips for that. 
Not to mention lots of overseas manufacturing that needs to be taken into account. 

One thing that has changed quite a bit is the reliance on physical retail. For example, GameStop—it’s a stock that’s often in the news, not because of how well it’s doing as a company. They used to be the hub—the big place for everyone to buy games. Now, they have more of an online presence. 
Same with Best Buy. Best Buy doesn’t sell physical media as much as they used to. But still, Amazon, Best Buy—all these places have a massive online presence for buying games, or even just buying game codes. You can go on Amazon and buy a digital code for any game. Not any game, but for many games. That’s a big part of that. 

I would say, in terms of AI, that’s still pretty nascent—obviously, as it is in basically any industry. I know Microsoft just had a press release today announcing something they’re calling “Muse,” which they’re using for development—for what they call game ideation. So if developers want to test out certain features or certain gameplay mechanics—or they said even as a way to improve classic games—I don’t actually know if this is going to go anywhere. I think it’s too early to tell, but it’s certainly something that all of these game companies are at least considering. 
And Microsoft obviously has their own massive plans in AI, so they’re going to be the first to try this stuff out. 

So I would say, yeah—semiconductors, any kind of manufacturing—retail is something that’s changed a lot but still has an important presence. And AI, I still say, remains to be seen, but lots of companies seem very interested in it. Microsoft is one. Square Enix—who makes Dragon Quest and Final Fantasy—they’ve had some comments from CEOs that they walked back after some player backlash. So, I don’t know—it remains to be seen how far that will go, I should say. 

Cassidy Clement 

Yeah, you mentioned the retail—the brick-and-mortar element. That kind of leads me to my next question, which is industry change or industry adaptation. 
So from your perspective, have you seen any major changes within the industry over the past several years, or something currently that could lead to a larger change in the industry? 

And my first initial thought is downloadable content. That’s a very evident item—I don’t have to go to GameStop anymore when I want to buy Lego Worlds. I hit purchase on my Nintendo Switch. Now I’m an adult—I don’t have to go and ask my parents for money to do that. 
But that used to be part of the wheel-and-deal of it all. You would go into a GameStop, look for the game, they’d offer you game protection, all these other things. 

What elements are you starting to see change the industry—or that have had a major impact in the industry over the past several years? 

Sam Martinelli

So on the software side—absolutely—downloadable content. But also live—what people call live services or “games as a service.” Often games that start out as free-to-play, or sometimes you have to pay some small price. Fortnite is the biggest example of this—or one of the most popular—where what’s becoming more common, according to a lot of data I’ve seen from places like RCNA, is players just buying and playing one game basically for years at a time because the game is constantly getting updates. 

So if you like Fortnite—and that’s not just like Roblox, that’s not just for the kids—everybody I know plays Fortnite or has played Fortnite at some point. They announce, “Hey, some character from some famous movie that you like is going to be in Fortnite. Here’s a new map, here’s a new event.” They’ve had concerts happen digitally within Fortnite, and so their view is: you can start the game and play for free, and every couple of months, we’ll say, “Hey, for 25 bucks, you get this battle pass that allows you to unlock all these new skins and new characters and new content.” And they can do that forever—as long as there’s a player base that’s willing to pay for it. 

And now everyone wants to do this—with, I would say, extraordinarily mixed results. 
Obviously, Activision has Call of Duty. They have their premium Call of Duty every year, which they charge $70 for, but they also have Call of Duty: Warzone, which is a free-to-play game that also has a massive player base of millions of daily active users. 
But everyone—except for maybe Nintendo, I guess—everyone wants to have something like that. Something that’s a cash cow. 

Something like FIFA Ultimate Team, where—for EA—they would have people spending money to build their own favorite soccer team of players from all over the world and all over different eras. That used to generate a billion dollars a year. I don’t know if it still does—I’m not as fully caught up on that—but everyone wants to have that. 

To the point where even Sony, who prides themselves on having really high-quality, polished single-player games like the Spider-Man games or God of War, now they’ve invested a lot of money over the last three to four years into building their own live service games. And they’ve mostly been failures, and some of these projects have been canceled already. 
And so it’s difficult to say whether or not this is a sustainable or workable solution for all these companies. But clearly, everyone seems to believe that they have to have at least one of these as a way to protect themselves for the future. 

I would say that’s the biggest one. 

I’d say a couple other things to keep in mind are: it’s more expensive than ever to make these big AAA games, so prices are getting higher. Even Nintendo released, a couple years ago, their newest Zelda game—Tears of the Kingdom—which was $70. And all their other premium games are $60. 

I’ll say subscription services—Nintendo Switch Online, Xbox Game Pass, PS Plus—those are fairly prevalent. They’re not cannibalizing sales entirely, but clearly a lot of games do rely on these services to get eyeballs. Microsoft just this week released a new RPG called Avowed. I’m not saying it’s going to sell millions and millions of units, but it certainly has a lot of eyeballs on it. And it’s made in-house. So the fact that you can just subscribe for 20 bucks a month—or whatever it is—and just get this game without having to think about it, that’s enticing to a lot of people. 

The last thing I want to mention is cloud. Cloud gaming is one of those things where it seems to be additive. Google made a big bet a few years ago on Stadia, and that didn’t work out for them because it wasn’t people owning their own games or hardware or anything. You paid $60 for access to a game that you could only play if you had a strong enough internet connection. Whereas Xbox Game Pass—that comes with cloud. So you can already play the games on a console, but you could also cloud stream it onto your phone or through an Amazon Fire Stick.  

Again, the technology’s not fully there yet. There’s still some input lag, which most of the time doesn’t matter—but if you are a competitive Call of Duty player, or if you want to win fighting games like Mortal Kombat or Street Fighter, that half-second delay might be the difference between winning and losing. So it’s hard to say how well adopted that’s going to be in the future. 

I would say those are the biggest— 

Oh, sorry. I have one more—if that’s… 

Cassidy Clement 

By all means, go for it. I have all my notes here—I’m very interested. I’m the customer spending the money on the Nintendo Friends package every year, so let us know. 

Sam Martinelli 

You mentioned Nintendo. The biggest change over the last 10 years was their handheld console that plays like a desktop console—console-quality games anywhere. Now, everybody wants to do that. I shouldn’t say everybody, but— 

Steam—sorry, Valve, which owns Steam (the biggest PC gaming platform)—released the Steam Deck a few years ago, which can play games like Elden Ring, Baldur’s Gate III, or Call of Duty—not Call of Duty, but that quality level of game—you can play that anywhere now. 

A lot of companies are working on not just cloud devices, but Sony released, a year or two ago, the PlayStation Portal—which is just like a little PlayStation controller with a screen on it—where you can stream your games from your console directly to that device. 

And Microsoft has mentioned—Phil Spencer, the CEO of Xbox Gaming—he said that it’s a few years away, but they’re working on a handheld too. And given Microsoft’s investments in cloud and their “Everything is an Xbox” campaign, that’s going to be a big thing to keep an eye on. 

Cassidy Clement 

Yeah, I was initially thinking about all of the additional items that bring the revenue directly to either the game creator or the console creator. And that kind of goes back to the original GameStop idea—where you would go in, you’d get a disc or a card back in the day—and then GameStop would try to upsell you on all these various items. 

Whereas now, if it’s all within their ecosystem, they’re able to retain all of that revenue from all of those transactions. If I want to play a game with my friends, I have to pay for the online friends package. If I want to unlock certain things in games, I have to have other people join the game with me online. 

It adds up, but I totally understand what you’re saying, which is: if you only pay or play one or two games a year, that cost is sometimes lower than a brand-new game if it’s only $25 a year—which is how people justify being superfans of games and buying all of the elements to it, and then playing it to their heart’s content. 

What’s also interesting is the cost of production and creation in the gaming sector now also looks at how they rely on other players in the space. And what I mean by that is the marketplaces these games live in. 

And I’m going a little bit back in time when I bring up this point, but I’m sure—I’m positive—that you remember the Epic and Apple scenario that took place from 2020 to 2023. It may honestly still be happening behind closed doors, I’m not totally sure. 

But for those of you who don’t know: Epic, who owns Fortnite, found a way to allow their users to purchase items within the app without having to trigger Apple’s commission. What happens is, if you are part of the Apple Store, you are technically supposed to pay a certain amount of money to Apple for being listed there—for any in-game purchases and for the app itself. 

And essentially, Apple was like, “Hey, you owe us money.” Epic said no. (This is a very truncated version, by the way.) But Epic’s technology—the Unreal Engine—was being used by many other game creators. And Apple was saying, “Okay, we’re going to go after the engine, then. No one’s allowed to have the engine on our space or our marketplace.” 

Which can be very detrimental. 
So that kind of leads me into my next question, which is: for people who are looking to invest within the video game space, in any capacity really—when it comes to a financial strategy—what are some things to keep in mind? 

Because it seems like there’s a lot more outside impact nowadays on these companies than there used to be. There might be a cultural-based interest—like you were talking about—maybe an NFL game, which may be more popular in the United States than in Europe. Or trends versus a solid company who’s bringing out these cash cows consistently. 

And then of course, if it’s something that’s so high in processing power or has a lot of—let’s say—digital token products, is there an environmental impact? (Something that gets talked about along with crypto.) 
What do you see in this space that are some things people should keep in mind? 

Sam Martinelli 

I think what people should keep in mind is—the big companies, because, as I said before, they’re all relying on live services. How we view their metrics has changed a little bit too. It’s not just your bookings—what are your sales? You have to think about monthly active users, daily active users, live services revenue. 

In terms of outside influence—yeah, the Unreal thing. Lots of companies use Unreal. Microsoft, last year, announced that they’ve revamped their Halo studios—Halo being their biggest IP—and now they’re going to, instead of using a proprietary engine, which they’ve been using for over a decade, they’re using Unreal. And they’ve shown some videos—it looks incredible. 

Same with Unity. They had that big problem where Unity said they were going to charge more for downloads from the creators. And then there was a big hubbub about that, and they rolled it back. 

But I would say those are things to keep in mind as well. You mentioned the cost of these games—with the Unreal Engine, these costs are getting higher, they need more people, and I’d say the average game development cycle is longer now than it used to be. 

So I remember as a kid on the Super Nintendo, I really liked the Donkey Kong Country games. Donkey Kong Country comes out in 1994. Donkey Kong Country 2 comes out in ’95. Donkey Kong Country 3 comes out in ’96. They had three games in the same franchise in three straight years—all coming out around the same time—with most of the same people working on them. That’s unconscionable now. That would never happen today. 

Avowed—which I just said came out this week—Avowed 2 isn’t coming out next year. It’s not coming out the year after that either. So as a result, if a company has a high-profile flop—if a game comes out and does not sell well enough—not only is it a disaster just because of that, but now they’ve spent five years working on something that they thought maybe five years ago had a big market. But you can’t possibly predict what the market will look like five years down the line. 

This is what I mentioned before about a lot of the investments in live services. Everyone wants this, right? But now there are more players in the game. And there’s only so much time everyone has. 

If they already have Fortnite, Apex Legends, Call of Duty: Warzone, and all these other games—they don’t have time for two more just because someone is making a new one. 

I also think about: do these games have a tail? Grand Theft Auto V came out in 2013 and is still in the top 20 sales charts most months. Mario Kart 8 Deluxe came out in the first or second month of the Switch. Same with Animal Crossing—you mentioned that. I was there with you. I was playing Animal Crossing in March 2020—every single day. But it wasn’t just that month that sold. It still sells well—in America, in Japan, and in Europe. 

Sam Martinelli 

Most of these companies don’t have that. Most of these companies don’t have that kind of longevity with their games. So when people are looking at or thinking about which stocks to invest in, I would say: just try to think about what’s their software output, what’s the cadence, and how well is that still selling years down the line. 

One last thing—you mentioned environmental impact. Obviously, any kind of manufacturing is going to have a major environmental impact. AI is going to have—it has—a major environmental impact. As I said before, it’s tough to know how much. And just to be clear, generative AI—video games use all kinds of AI and machine learning technology and have for years—that are not using large language models. But that’s something also to keep an eye on there, I would say. 

Cassidy Clement 

Yeah, the timing and the longevity portion—sometimes it’s a right place, right time. Other times, it may be brand reputation.Mario Kart—I got it in 2020. It is now five years later, and I just played it last week. Mainly because they have the downloadable content—also because I like Nintendo. But there’s also a very interesting point about the timing of some of these releases. Nobody really could have predicted, when Animal Crossing—I think it’s New Horizons—was being developed, that a global pandemic was going to occur when it rolled out. 

And their in-game economic structure—similar to that of the U.S. stock market—is based in turnips. And it was starting to replicate… People were starting to create technical analysis charts on turnip prices for this game. Yes, gamers were very bored in March of 2020. That is why you all are learning today. 

Sam Martinelli 

I just want—I do want to add one thing on that as well. That actually resulted in a massive explosion in video game spending. COVID, in 2020 and 2021—because everyone… It wasn’t just people like me who were playing these games anyway. It was people I knew who would buy a Switch because they just had nothing better to do—they were sitting at home. 

And then, as the years have gone on and things have normalized a little bit, you’re seeing a steady decline. It did also certainly help that the PlayStation 5 and Xbox Series X both came out in 2020. So the new console honeymoon was over. The COVID spending is over. So then that’s resulted in a lot of layoffs across the board. 

And that includes at—we’re seeing it everywhere in America. There are lots of companies with layoffs, but with video games, I think in 2024, like every single week there was some massive announcement from a big company that they needed to let go 10, 20, 30—hundreds of people. Microsoft laid off over a thousand after the Activision Blizzard integration. So that kind of investment doesn’t last. And they couldn’t—no one could have—they, these developers couldn’t have possibly known how long it was going to last. 

Cassidy Clement 

Absolutely. And the console prices also have significantly gone up. 

Initially, a big thing that I recall from my childhood—and I still see, usually not as frequently this past year—but between the Santa Claus rally window of October to January, you’d normally see a lot of game combo bundles. And those aren’t as prevalent because the cost is higher now. 

And they have to try to get you to buy in for the console to then buy those other things. So those items aren’t as, I guess you could say, advantageous for the manufacturer or the creator anymore. Which is unfortunate, because they’re still there—I guess I could just say they weren’t as pushed this year as I’ve seen in other years. 

I have a background in marketing, so I’m always looking at the ads and trying to decipher: why was this created this way? And who is this tailored to? 

But this sector specifically is very interesting because it’s also sometimes used—now—certain games are used or game engines are used to train people in jobs, like simulations and all sorts of things like that. 

Sam Martinelli 

For that—Unity. I know a lot of people who use Unity for various work. 

Cassidy Clement 

Yeah—flight simulation, surgery simulation—so many different things. 
And it’s very interesting to see what way this market is going, because it truly puts its hand in every technological basket. 
And it also is an interesting thing because it has a social aspect that brings the companies into different ebbs and flows. 

So, it was awesome having you today, Sam. Thanks so much for joining us. 

Sam Martinelli 

Oh, my pleasure. 

Cassidy Clement 

Great. So, as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com/campus.Follow us on your favorite podcast network, and feel free to leave us a rating or review. Thanks for listening, everyone.