PRXXF - The 3 Most Undervalued Gaming Stocks to Buy in July 2024

2024-07-09 13:49:23 ET

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While the overall market continues to reach new highs, gaming stocks have largely lagged behind. This trend can be attributed to brutal competition prevalent within the gaming industry, with both major studios and independent developers fiercely fighting for market share and gamers’ available playtime. This cutthroat industry environment has damped growth and profitability prospects for many companies, leaving many gaming stocks undervalued.

However, this also presents significant opportunities for investors seeking exposure in the space. In fact, despite certain challenges, the gaming industry remains robust, with solid demand and a growing global audience. Many companies, unfairly penalized by market conditions, possess solid fundamentals and promising futures. Some of them also trade at rather attractive levels, offering significant upside potential as they recover and thrive in an expanding market.

In this article, I will present three gaming stocks that seem too cheap to ignore. Each of these companies has fallen victim to the broader industry’s sell-off but holds the potential for substantial gains. Let’s take a closer look!

Paradox Interactive AB (PRXXF)

In my view, one of the most promising and undervalued gaming stocks today is Paradox Interactive (OTCMKTS: PRXXF ). This Sweden-based company is a renowned player in the gaming industry, particularly celebrated for its niche strategy and simulation games. It owns titles such as Crusader Kings , Europa Universalis , Stellaris and Cities: Skylines . These games are known for their depth, sophistication and high replay value, qualities that are highly appreciated by their fans. Combined with its steady release schedule, Paradox Interactive tends to enjoy predictable and steady revenue streams.

Despite its robust track record in recent years, Paradox Interactive stock is now trading at its 2018 levels. The fact the stock has declined by a significant 44% over the past year seems rather puzzling, especially given its sustained growth and top-tier profitability. To elaborate, Paradox has increased its revenues at a compound annual growth rate (CAGR) of 18.6% . Further, its margins have historically been industry-leading, with net margins landing at a juicy 20% last year. With its ongoing momentum set to last and shares trading at a forward price-to-earnings (P/E) ratio of 23.6x, Paradox’s investment case is quite compelling.

Capcom (CCOEY)

Another overseas gaming stock with strong prospects from its current share price levels is Capcom (OTCMKTS: CCOEY ). The Japanese company has a legendary reputation in the gaming industry for its iconic franchises and usually high-quality titles. Its intellectual property ( IP ) includes series such as Resident Evil , Street Fighter , Monster Hunter , and Mega Man , which have captivated generations of gamers worldwide.

In recent years, Capcom’s strategy has significantly accelerated revenue growth through several key initiatives. One major approach has been remastering and re-releasing classic titles. This has not only pleased longtime fans but also drew younger gamers who missed these games at their initial launch. It converts them into new fans and drives future sales prospects. Furthermore, Capcom has pursued smart partnerships and collaborations, such as Resident Evil x Fortnite and Devil May Cry x Netflix . This expanded its audience and created valuable cross-promotional opportunities.

The strategy resulted in Capcom’s revenue and net income increasing at a CAGR of 8.8% and 28.2% over the past year. In the meantime, the company has a substantial net cash position of $747 million , which should provide a notable margin of safety. While the stock might not seem too cheap at first glance, trading at about 30x last year’s earnings per share ( EPS ), Capcom’s potential for outsized earnings growth over the medium term remains robust, overshadowing this multiple.

Take-Two Interactive (TTWO)

Last but not least, Take-Two Interactive (NASDAQ: TTWO ) seems like a promising bet in the gaming industry moving forward. The company is renowned for developing some of the highest-quality AAA titles, including iconic franchises such as Grand Theft Auto , Red Dead Redemption , and NBA 2K . These titles are critically acclaimed, and while Take-Two’s releases are not too frequent, its games have a massive, dedicated player base that ensures robust sales over extended periods.

This approach has proven successful as each release typically results in notable revenue and long-term player engagement. Both Grand Theft Auto V and Red Dead Redemption 2 , continue to generate significant sales years after their initial launches.

Looking ahead, Take-Two’s growth prospects seem incredibly promising, particularly with the anticipated release of Grand Theft Auto VI . For context, the Grand Theft Auto series is one of the best-selling video game franchises of all time and the next installment, which has been under development for about a decade, is expected to break sales records. It should drive considerable revenue growth for years to come.

Therefore, the stock currently appears incredibly expensive at a forward P/E ratio over 60x . This valuation reflects Wall Street’s expectations for explosive revenue and EPS growth following the eagerly awaited release of GTA VI. The anticipated success of this blockbuster title is likely to justify the high multiple over the medium term. It suggests that Take-Two remains an undervalued gaming stock at its current levels.

On the date of publication, Nikolaos Sismanis did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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