The Best Gaming Stocks to Buy

The electronic gaming and multimedia industry falls under the communication services sector, which is dominated by internet giants like Meta Platforms META and Alphabet GOOGL/GOOG. Meanwhile, the global gaming industry is largely made up of smaller companies with market caps of less than $10 billion. The industry has underperformed the overall sector over the past 12 months: The Morningstar Global Electronic Gaming and Multimedia Index returned 5.64%, while the Morningstar Global Communication Services Index was up 32.71% for the trailing one-year period as of May 8, 2024.

Despite fierce competition in the gaming industry, a few companies have managed to carve out economic moats, or durable competitive advantages, that Morningstar analysts think will give them an edge over their peers. Some of these names look undervalued today.

4 Best Gaming Stocks to Buy Now

The stocks of these gaming companies with economic moats are at least 10% undervalued as of May 9, 2024.

• NetEase NTES
• Roblox RBLX
• Take-Two Interactive Software TTWO
• Electronic Arts EA

How We Screened for the Best Gaming Stocks

To come up with our list of the best gaming stocks to buy now, we screened for:

• Companies in the electronic gaming and multimedia industry whose stocks trade on a US exchange.
• Gaming companies that have narrow or wide Morningstar Economic Moat Ratings. We think companies with economic moats have a competitive advantage over their peers.
• Gaming stocks that are undervalued, as measured by our price/fair value metric.

A few big names in the gaming industry, including Ubisoft UBSFF, Sega SGAMF, and Nintendo NTDOF, did not make our list of best gaming stocks to buy because Morningstar does not have fair value estimates for the shares of these companies that are available to US investors.

Here’s a little more about each of the best gaming stocks to buy, including commentary from the Morningstar analyst who covers each company. All data is as of May 9, 2024.

NetEase

• Morningstar Price/Fair Value: 0.62
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Large Core

The most undervalued company on our list of the best gaming stocks to buy, NetEase started as a Chinese internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known multiplayer franchises in China—Fantasy Westward Journey. NetEase stock is 38% undervalued relative to our $158 fair value estimate.

Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach. Over the past years, the firm has established iconic titles such as Onmyoji, Knives Out, and Identity V. Every year, the company publishes dozens of games across almost every genre and game play. In addition, NetEase is also collaborating with firms such as Blizzard, Marvel, and Microsoft to release games based on famous global intellectual property like Diablo, Harry Potter, and Lord of the Rings. Over the foreseeable future, we expect NetEase to continue to leverage its in-house research and development team and user data to develop next-generation games.

Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. We believe the firm is positioned to not only continue capitalizing on the success of Westward Journey titles but to also keep diversifying its revenue into new franchises.

While games will remain NetEase’s core cash flow driver, we think the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential. Cloud Village, the group’s music streaming arm, had over 200 million monthly active users in 2023 and remained the second-largest music streaming platform in China. Youdao is the group’s attempt at cracking the online education market, but recent regulatory changes in China add uncertainty to this business model.

Roblox

• Morningstar Price/Fair Value: 0.61
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Mid-Cap Growth

Roblox operates an online video game platform that lets gamers create, develop, and monetize games for other players. After a quarter of weakening player engagement, we lowered our fair value estimate of Roblox to $50 from $60 per share. Roblox stock trades at a 39% discount.

The firm offers developers a hybrid of a game engine, publishing platform, online hosting and services, marketplace with payment processing, and social network. There is no entry cost to try out Roblox or the vast majority of user-developed games. Thus, to drive booking growth and keep the Roblox model churning along, the new user must purchase and spend Robux, the platform’s tender.

Roblox heavily benefited from the stay-at-home restrictions at the start of pandemic with very impressive top-line growth, even more so than its video game peers. It expanded its user base from 19.1 million daily active users in fourth-quarter 2019 to 65 million in the second quarter of 2023. We believe that the combination of popular games and large userbase creates an effective network effect that will consistently attract more players and developers. Additionally, we expect that the firm will be able to increase penetration in non-US markets. As a result, we expect that DAUs will exceed 100 million by 2027.

The platform has also successfully increased bookings per DAU through both increased hours of engagement and higher spending per hour. However, success in the US and Canada has driven most of this growth as the firm’s large and mature customer base ramped up usage during the pandemic. Domestic users now generate more than 4 times as much revenue as those in Europe and 6 times as much as those in Asia-Pacific. We expect this gap to shrink over the next decade as more players in other markets become heavy users and move into age cohorts with higher disposable income.

Longer-term, we assume Roblox continues to invest in adding new features to help keep both developers and teenage gamers engaged with the platform. While an all-encompassing metaverse may be very far from realization, we think that Roblox’s steps toward a metaverse will help the platform hold on to users and developers as they age.

Take-Two Interactive Software

• Morningstar Price/Fair Value: 0.88
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Mid-cap Growth

Take-Two Interactive Software looks 12% undervalued relative to our $165 fair value estimate. Take-Two is one of the larger video game publishers and owns one of the largest most well-known video game franchises in Grand Theft Auto. With the acquisition of Zynga, the company is also one of the largest mobile game publishers. We believe the firm is well positioned not only to capitalize on the success of GTA but also to continue diversifying its revenue beyond its signature franchise.

Take-Two has capitalized on the shift within the industry toward a bifurcated market consisting of major blockbuster titles on one side and smaller independent games on the other. The firm generally focuses on the higher end, using its capital to fund the higher-budget blockbusters and its marketing advantage over independents to support its titles. Over the past 10 years, the firm has established new franchises such as Borderlands while reinvigorating older ones like Xcom. We expect the company to continue to invest in new intellectual property and to fund sequels and the expansion of its core franchises onto mobile platforms.

Like its peers, the firm is focused on engaging users beyond the initial game sale by expanding the use of multiplayer options and releasing downloadable content. Online game modes lead users to develop social networks, thus encouraging player loyalty. DLC can either refresh the multiplayer experience by introducing new maps and levels or extend single-player engagement with new storylines. Take-Two introduced a separate multiplayer mode, GTA Online, with the launch of GTA V in 2013. The mode has helped this installment sell over 145 million units by expanding its life cycle and monetization. GTA V launched onto its third generation of consoles in March 2022, likely pushing the potential launch of GTA VI out into fiscal 2025.

Electronic Arts

• Morningstar Price/Fair Value: 0.90
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Mid-Cap Core

Rounding out our list of the best gaming stocks to buy, Electronic Arts stock trades at an 10% discount. Electronic Arts is one of the world’s largest video game publishers and owns some of the most well-known video game franchises, including Sports FC (formerly FIFA), Madden, and Battlefield. We expect the firm will continue developing compelling new versions of its existing franchises, generating cash flow that provides the ability to invest in new titles and acquire established ones. We think EA stock is worth $140 per share.

Like its peers, EA has benefited from the shift within the industry toward a bifurcated market consisting of major blockbuster titles on one side and smaller independent games on the other. EA’s primary competition remains other large third-party publishers, such as Tencent, Take-Two, and Activision, as well as the first-party publishers Sony, Nintendo, and Microsoft. EA is also a large publisher on mobile platforms, a highly competitive space.

The firm is focused on engaging players beyond the initial game sale by expanding the use of multiplayer options and releasing downloadable content to generate revenue. Online multiplayer games or game modes lead users to develop social networks, thus encouraging player loyalty via either informal friendship networks or actual teams/clans. DLC can either refresh the multiplayer experience by introducing new maps and levels or by prolonging single-player engagement by extending the storyline.

EA has also used DLC and microtransactions via Ultimate Team modes to generate additional income from the EA Sports FC and Madden games. The Ultimate Team modes have deepened the connection with gamers and have rapidly become among the most played modes on both games.