Many video game stocks soared in 2020 as consumers purchased more consoles and games throughout the pandemic. But over the past year, many of those stocks lost their luster as investors fretted over post-pandemic slowdowns. China's regulation on video game companies, the ongoing chip shortage, and the broader sell-off in tech stocks made gaming stocks even less attractive.
The video game sector will face tough year-over-year comparisons over the next few quarters. But over the next decade, many of the top video game stocks could rally much higher. Let's take a look at three stocks that fit that description: Nintendo (OTC:NTDOY), Unity Software (NYSE:U), and Roblox (NYSE:RBLX).
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1. Nintendo
Nintendo has produced market-leading gaming consoles for nearly four decades, and its first-party franchises -- which include Mario, Zelda, and Metroid -- have entertained multiple generations of gamers.
Nintendo launched its latest video game console, the Switch, in 2017. It expanded that lineup with the cheaper Switch Lite in 2019 and introduced the Switch OLED, which adds a bigger and better screen, this year. Nintendo has shipped 91.1 million Switch consoles over the past four-and-a-half years.
However, Nintendo's stock has lost nearly a third of its value this year because it faces a near-term slowdown. Nintendo's sales soared 34% in 2020 as more people played its video games during the pandemic, but it expects its sales to decline 9% this year as it faces tough year-over-year comparisons and grapples with the global chip shortage. Some investors were also disappointed that Nintendo didn't introduce a more powerful Switch or an entirely brand new console this year.
Nintendo's growth will inevitably cool off this year, but I believe it will surprise gamers and investors again -- as it did with the original Wii and the Switch -- over the next decade. Meanwhile, the expansion of its franchises with new theme park attractions and movies could keep people interested in its games, boost its licensing revenue, and pave the way for new console and game releases in the future.
2. Unity Software
Unity's game engine powers over half of the world's PC, console, and mobile games. Unity makes it much easier to develop cross-platform games. In the past, developers often built their own graphics, rendering, sound, and user interface features then coded them separately for each gaming platform.
That process was buggy, time-consuming, and expensive. That's why Unity and other similar game engines, like Epic Games' Unreal Engine, have become essential tools for most video game companies.
A game developer can build a game within Unity without any additional tools and launch it across multiple platforms. Unity also provides additional tools for integrating ads, processing in-app payments, hosting multiplayer games, and analyzing a game's performance.
The global gaming market could grow at a compound annual growth rate (CAGR) of 12.9% from 2020 to 2027, according to Grand View Research. If Unity merely matches that growth rate, its annual revenue could soar from $772 million in 2020 to over $1.8 billion in 2027.
But Unity is already growing much faster than the gaming market. Its revenue rose 43% in 2020, and it expects 35% to 37% growth this year. It isn't profitable yet, but it expects to achieve non-GAAP profitability by 2023. Unity's stock isn't cheap at 34 times this year's sales, but its revenue could grow much larger over the next decade if it continues to power more than half of the world's video games.
3. Roblox
Roblox can be considered a gamified, tween-oriented version of Unity. Its platform enables people to create and share simple block-based games without any coding knowledge, then monetize them with an in-game currency called Robux -- which can be exchanged for real-world cash.
Roblox became a household name during the pandemic as more students stayed at home and spent more time on their computers. Its bookings surged 82% in 2020, then grew another 77% year over year in the first half of 2021. It ended the second quarter with 43.2 million daily active users, up 29% from a year ago, as its average hours engaged rose 13% to 9.7 billion.
Those growth rates are impressive, but Roblox remains unprofitable, faces concerns about a post-pandemic slowdown, and has a stock that looks expensive at 17 times this year's sales. Its dependence on tween users could expose it to more safety hazards for minors as the platform expands, and some of its users could graduate to more advanced game engines like Unity or Unreal to create more sophisticated games.
Those concerns are all valid, but I believe Roblox's stock could head higher over the next 10 years because it's a self-sufficient, creator-powered platform like YouTube. Roblox doesn't need to develop new games like Nintendo or court game studios like Unity -- it simply needs to let its community thrive and produce more games on its own to continue expanding.