Video Games Thrive During Pandemic Year Of New Console Launches, But Is An M&A Battle Royale Brewing?

The video game sector is seeing double-digit growth during COVID-19 and is poised for another shot in the arm by year’s end when Microsoft and Sony launch new consoles, according to industry reports by two Wall Street media analysts.

The strong performance of gaming at a moment when so many other segments of media are reeling, combined with major tech firms booming in 2020, could be setting the stage for major consolidation, they note.

Tim Nollen of Macquarie Capital wrote that gaming is “rapidly evolving into a consumer metaverse: interactive games, media and advertising integrations, and VR/AR render gaming a vast ecosystem of consumer experiences.” He pegged the total global value of video games at between $150 billion and $200 billion, which is five times the level of movie box office, eight times that of recorded music and roughly equal to all TV advertising around the world. Growth in 2020 is likely to reach double digits, an improvement over high-single-digit growth in recent years, with COVID-19 a major stimulant.

Along with Nollen’s 30-page overview of the entire sector, Macquarie also released a note to clients initiating coverage of Corsair Gaming, a newly public computer and peripherals maker. Along with Corsair, Macquarie has “outperform” ratings on Sony, Nintendo and Microsoft.

The transition of games from a physical-disc-and-hardware experience to streaming is not likely to dramatically undercut the need for equipment, as it has in other entertainment sectors, Nollen predicts. “While one might expect the rise in streaming services to obviate the need for hardware – you can stream the games and the processing power on your laptop – we believe quality begets quality: demand for higher-end equipment will continue to rise, especially in peripheral equipment such as controllers, headsets and streaming gear.”

Eric Handler of MKM Partners sees higher margins from the digital transition as a key profit driver for major publishers. He issued a note to clients today reaffirming “buy” ratings on Activision Blizzard, Take-Two Interactive, Zynga and Electronic Arts.

Microsoft’s $7.5 billion acquisition of publisher Bethesda Games was the first multi-billion-dollar acquisition by the parent of Xbox or PlayStation and is “notable,” Handler wrote. As competition grows between Xbox and PlayStation over which can secure the most exclusive games, there could be more incentive for M&A. Amazon and Google have also started to move into gaming, which Handler says could stimulate more deals, “without any major pressure” on the core businesses of firms now worth upwards of $1 trillion. All four of the companies Handler covers could find themselves as acquisition targets, he believes.

“The $7.5 billion valuation for Bethesda (which has extreme earnings volatility as it lacks a regular cadence of releases, thus making the take-out multiple an extremely difficult task) is well above the speculated price tag we had heard bantered about in recent years,” Handler added, “which shows the scarcity value of independent studios’ owning of top franchise games.”

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