Video games have come a long way from the arcade classics of the 70s and 80s. Today’s home gaming systems bring a quality to the graphics, audio, and storytelling that early gamers could only dream of. And now, the gaming industry is on the brink of several major technological breakthroughs. The advent of generative AI, virtual and augmented reality systems, and live streaming all promise to take online video gaming to the next level.
It’s not just players and gamers who are feeling the excitement. For investors, there’s nothing more exciting than looking at an industry on the cusp of radical changes.
Yet, amidst the excitement, it’s crucial to recognize that not all gaming stocks are equally promising. While some hold the potential for solid growth, others may be fueled primarily by hype. It’s essential for savvy investors to discern between the two.
These are the thoughts behind Wedbush analyst Michael Pachter’s review of two well-known gaming stocks: GameStop (NYSE:GME) and Playtika (NASDAQ:PLTK). Pachter provides insight into the key factors investors should consider before making a decision and then chooses the superior gaming stock to buy right now. Let’s take a closer look.
GameStop
The first stock we’ll look at is an old name in video gaming, GameStop. This stock is no stranger to controversy; it was at the center of a short squeeze in January 2021, during which the shares jumped as much as 1,500%. More recently, GME stock has been on a rollercoaster ride, spurred by the meme stock personality Roaring Kitty, who posted an online video detailing his personal stake in the stock and its unrealized gains in the hundreds of millions.
Turning to the mundane matters, the company operates a global network of brick-and-mortar stores, as well as an online retail site, offering everything that gamers need, to get started or to upgrade their systems. Products in the stores include top-end gaming console systems, online gaming peripherals, and even various collectibles, such as sports and gaming trading cards or even vintage gaming cartridges.
GameStop has both advantages and disadvantages as a physical retailer in the video gaming space. On the positive side, the company can rely on their customers’ ‘fandom’ for support; video game supporters are well-known for their love of particular systems or accessories – and for their favorite collectibles. On the negative side, the availability of gaming products online, and the expansion of online gaming, have put a serious dent in GameStop’s business model in recent years.
This can be seen when we look at GameStop’s last earnings report, which covered 1Q24. Top line revenues came to $881.8 million, down almost 29% year-over-year and $113.5 million less than had been expected while the bottom line, non-GAAP EPS of -$0.12 was 3 cents lower than had been anticipated. The Q1 report revealed a significant downturn in hardware and accessories sales, plummeting by 30.4% year-over-year to $505.3 million, while software sales also experienced a notable decline, dropping by 29.1% to $239.7 million.
So, is GameStop’s stock poised for a significant decline of over 50% from its current levels? That’s the troubling suggestion from Wedbush’s Michael Pachter.
“We see no adjacent businesses that will allow GameStop to leverage its retail footprint, and the company has no particular expertise in anything other than retail sales. We cannot see how GameStop adds any value by operating any new businesses, particularly not now after its entire C-suite was either terminated or chose to depart. The prior strategy (‘be like Amazon’) was an abject failure, and the company fired or lost the three former Amazon executives it hired to pursue the strategy. Its strategy to sell NFTs fell apart after it partnered with the now defunct FTX (yes, that one), and its CEO has not made any public statements other than Twitter memes since his assumption of the role last year,” Pachter opined.
The analyst goes on to put an Underperform (i.e. Sell) rating on GME shares, advising investors to get out now. His price target of $13.50 suggests that the current share price of $28.22 is vastly overvalued. (To watch Pachter’s track record, click here)
Pachter currently stands as the sole analyst offering a rating for GameStop. (See GME stock analysis)
Playtika
Next up is Playtika, a digital marketing and social gaming company, offering a wide-ranging, varied portfolio of game titles for online PC and mobile use. Playtika has a global presence, with offices in the US, Europe, the Middle East, and Australia. The company’s games include online bingo, various card games, video slots, and social poker variations – it’s a long list, with something for everyone.
The company has been in business since 2010 and went public in 2021. Playtika employs more than 3,500 people across its 17 international office locations and processes more than 9 terabytes of data every day, generated by its 34 million-plus monthly active users. Playtika was an innovator in free social gaming, as well as live game operations. The company boasts that it has had top-grossing titles for five consecutive years.
Playtika has a proven history of success and innovation in the gaming sector and has consistently generated more than $600 million in quarterly revenues for the past several years. Its last earnings release, for 1Q24, continued that, showing a top line of $651.2 million. This was relatively flat year-over-year and beat the forecast by more than $10 million. At the bottom line, Playtika’s earnings missed the forecasts by 2 cents, coming in at 14 cents per share. The company finished the quarter with $1 billion in liquid assets on hand.
Looking ahead, company management expects to see full-year revenue for 2024 in the range between $2.52 billion and $2.62 billion, a prediction that is in line with the Street’s consensus expectation of $2.57 billion.
Pachter, in his coverage of this stock, lays out a clear case for Playtika to generate higher returns going forward, writing, “We believe Playtika is undervalued at current levels. The company is well-positioned to leverage difficult industry dynamics through its M&A capabilities. Management intends to deploy between $600 million to $1.2 billion in capital on M&A over the next three years and has a history of successful accretive acquisitions, suggesting to us that Playtika can return to delivering top – and bottom-line growth in the next two years.”
Getting into specifics for the next couple of years, Pachter adds, “For FY:24, we are maintaining our estimate for revenue of $2,580 million and increasing our estimate for EBITDA to $770 million from $755 million. For FY:25, we are increasing our estimate for revenue to $2,630 million from $2,600 million and maintaining our estimate for EBITDA at $800 million.”
These comments back up Pachter’s Outperform (i.e. Buy) rating on Playtika’s shares, and his price target of $11.50 suggests that the stock could gain ~33% in the next 12 months.
Overall, the three recent analyst reviews on Playtika, including 2 Buys and 1 Hold, give the stock its Moderate Buy consensus rating. The shares are currently trading for $8.66 and the $10.08 average target price implies a one-year potential upside of ~16%. (See PLTK stock forecast)
With the facts laid out, based on recent data and share performance, it’s clear that Wedbush recommends Playtika as the superior gaming stock in today’s market.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
