Profit Pregame

Two Big Hitters of the Gaming World Went Toe-to-Toe

An acquisition standoff between two of the biggest video game producers has ended.

What’s happening?

With the massive success of the video game industry over the course of the pandemic, and so many more users coming online every day, video game producers are looking for ways to expand their customer base and capitalize on the gold mine of in-game purchases.

In-game purchases raked in over $159 billion in 2020 and are expected to exceed $200 billion by 2023.

In November, Take-Two Interactive Software, Inc. (TTWO) – maker of massively popular games like Grand Theft Auto, Red Dead Redemption, NBA2K, and many more – reached an agreement to purchase Codemasters Group Holdings plc (CDM.L) for $1.06 billion.

The deal would have brought Codemasters’ popular series of racing games into the Take-Two fold.

But in December, rival game studio Electronic Arts Inc. (EA) outbid TTWO with an offer of $1.2 billion. Take-Two announced this week that it is withdrawing it’s offer, effectively bowing out of the bidding war.

Video games are one of the hottest and potentially most profitable industries right now. Here’s why…

Where’s the money?

The video game industry was already growing at a good pace even before COVID-19 hit. But with so many people stuck indoors and desperate for entertainment, their popularity skyrocketed in 2020.

I noted a few weeks ago that U.S. video game sales had risen 23% YoY. And platform and game developers around the world have also seen significant spikes in purchases. And while we won’t be stuck at home forever, sales are expected to stay at elevated levels. The pandemic has likely permanently changed the entertainment habits of millions of people, creating a new wave of return customers.

As a whole, the video game industry is projected to grow at a CAGR of 12.9% from 2020 to 2027.

So which video game producer should you be investing in to ride this wave of cash?

How do I get some?

Even though it ultimately lost the bidding war for Codemasters, Take-Two is still my favorite stock in this space.

With the interest rates basically free, that means that companies can issue debt and buy up their rivals. Take-Two took a shot, but in the end decided that it didn’t want to overpay for the acquisition. Honestly, this is a company that Take-Tow doesn’t even need.

TTWO already has some of the most popular video game titles in the world in its arsenal, and their user base is still growing. For example, its NBA 2K20 basketball game saw an 82% increase in active players over the course of 2020.

And with TTWO’s aggressive goal of releasing an additional 93 games over the next five years, we’re sure to see some explosive growth.

I think TTWO is a buy on a pullback as the stock will move higher in the coming months and years.

Speaking of Growth…

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In the Spotlight: These earnings will tell us a lot…

Today marks the first of the 2021 earnings reports for big banks as JPMorgan Chase (JPM) and Wells Fargo (WFC) report their results from Q4 of 2020.

With interest rates so low and a ton of Americans still out of work, I don’t think anyone will be surprised if we see some muted numbers. What Wall Street will really be focusing on is the forward guidance in these reports.

As we hopefully get the virus more and more under control, many believe that early 2021 will be when we start to right the ship and more businesses and individuals begin borrowing again. The banks are a great bellwether for the health of the economy, so I’ll be back next week with more analysis on the results and some of my favorite trade ideas.

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