Video games are about victory in 2023.
After a sluggish 2022, the video game industry will unlock new stages of growth next year as more high-priced, high-profile games and next-gen consoles launch. In fact, 2023 will likely be a turning point as long as publishers continue to release new “triple-A” games that are considered the best in the genre. The recovery could even start as early as this year, with new stocks entering the market in anticipation of the holiday season, giving investors an early window.
“Video game development teams are seeing better productivity and have improved efficiency. At the same time, stocks that have been strategically pushed back are more likely to enter the market in 2023,” said Seyon Park, an analyst at Morgan Stanley Research, which covers telecom and internet stocks in Seoul. “We see an abundance of quality content as the most important factor behind our expectations for a strong market recovery in the upcoming holiday season.”
According to Seyon, a few key factors are likely to drive gaming growth, including:
More next-gen consoles and new games: Updated gaming consoles will be available to more homes next year as supply chain issues ease. For example, a major console manufacturer is expected to sell around 18 million units by March 2023, bringing the installed base of games consoles to a total of around 37 million units sold since 2020. The surge in next-gen gaming consoles, in turn, triples -One game evolution. Many third-party providers have delayed game launches in the face of these global supply chain disruptions, and as such, Morgan Stanley Research expects new title launches to accelerate into 2023.
Regulatory change in China: In 2021, to curb gambling addiction among youth, the Chinese government restricted players under the age of 18 to gaming on school evenings and one hour of gaming on weekends and holidays. That’s likely to change, Seyon says. “We are seeing the impact of regulatory action in China fading and gradually recovering as underage restrictions normalize,” he says, noting that China approved several new gaming licenses in September. “These are early signs that the regulatory environment has turned the tide,” adds Seyon.
Defense in a possible downturn: Recessions aren’t necessarily bad for gaming: staying home and fighting zombies is generally cheaper than a night out with friends, even with the initial investment in games and consoles. “Games sales have proven resilient to down economic cycles,” said Omar Sheikh, analyst on the European Media team. This offers investors the opportunity to build early holdings in a sector that offers attractive valuations.
In the past, consumers have consistently spent on video games during recessions.
Despite the general optimism, there are a few factors that could spell the end of growth:
- Rely on proven content instead of developing new games: Like many other entertainment industries, game publishers tend to invest in proven winners rather than pouring money into new genres. This mindset is a potential problem because “innovative content brings new players into the gaming world,” says Sheik. “The robust pipeline of new games in 2023 may show that creativity in the gaming world is still thriving, but should this fall short, we could see downsides to our longer-term growth prospects.”
- A slowing mobile market: There is already a large user base and mobile game market penetration is beginning to reach saturation, especially in the US, Korea, Japan and China markets. “This means that spend per player has to be a key growth driver, which is why we’re emphasizing content quality,” says Seyon.
- The threat of short videos: Short-form video platforms have attracted the attention of many potential players who prefer the format over other online entertainment, especially in China. Quality gaming content has long been an industry driver, Seyon says, but “short-form video could pose a risk to casual genres.”
All in all, however, Morgan Stanley analysts remain bullish on the industry. “Content is a key driver of market growth, especially for more mature markets, and investors should focus on publishers with well-established intellectual property teams and creative development teams,” says Sheikh. “Valuations at multi-year lows are extremely attractive for long-term investors as companies with a track record and strong pipeline could see earnings growth beyond the next year.”