Video games: industry slowdown does not mean game over

“Go touch some grass” is a popular online insult for overexcited gamers. Unfortunately for video game companies, the kids are doing just that. Having enjoyed a pandemic-fuelled spending surge, the industry has hit a slowdown.

With restrictions over, gamers stepped away from their keyboards. Global spending on video game software is expected to fall over 4 per cent this year to $184bn, according to gaming data company Newzoo. That is a far cry from the 23 per cent increase in 2020.

Recent company results offer little hope that the forecast might be wrong. Activision Blizzard, which agreed to an acquisition by Microsoft for around $69bn, reported a 14 per cent drop in revenue and an even bigger slide in profits for the third quarter. Both Electronic Arts and Take-Two Interactive have cut their full-year sales outlook.

Roblox experienced a sharp slowdown in revenue growth in the last quarter. The stock, which went public via a direct listing at around $45 a share, is now priced below $28. It trades on 9 times revenue, down from 50 times 18 months ago.

Do not hit the game over button yet. Video game companies are dealing with tough comparisons following two banner years. A dearth of must-have hit games this year and a strong US dollar have not helped. Electronic Arts, which earns more than half of its revenue from outside the US, said it would take a $200mn hit from currency headwinds.

For investors, the recent slide in share prices and valuations offer an opportunity to separate the losers from the high scorers. Newzoo predicts the industry will return to growth next year and will generate over $211bn in sales by 2025. Game publishers focused on community building remain a good bet. Roblox, whose games engine also functions as a social network, fits the bill.

Share prices have adjusted to demand settling back down to normal levels. The popularity of gaming will not end just because players go outside now and again.

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