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The Top Video Game Stock Right Now

Video game stocks have been strong performers during the pandemic on the investment theory that more people staying home means more video game play and more revenue for video game companies. That's been true to some extent, but there may not be as much growth as you think. Plus, there's more disruption than ever in the industry.

Big names like Activision Blizzard (NASDAQ: ATVI), Electronic Arts (NASDAQ: EA), and Take-Two Interactive (NASDAQ: TTWO) that dominated console and personal computer (PC) games have seen upstarts like Fortnite and game platform Roblox capture young gamers' attention. Amid the industry's disruption, there is one stock that stands above the rest, and that's game-engine maker Unity (NYSE: U).

Image source: Getty Images.

Traditional video games are losing their luster

The reality in video games is that the biggest names in the industry are losing their luster. Not only are console games not selling like they used to, but it's becoming easier for new game makers to enter the market and quickly take market share.

You can see below that Activision Blizzard and Electronic Arts have seen revenue stagnate over the last three years, while Take-Two Interactive has been the only one to grow at a significant clip.

ATVI Revenue (TTM) data by YCharts

Despite tepid growth, video game companies still trade for lofty earnings multiples of over 30 times.

People are playing more games, with mobile, virtual reality (VR), augmented reality (AR), and PC game play going up overall. So, investors should be looking for video game companies that can benefit no matter who makes the next hit game.

What video games are built on

The game engine is really the foundation of the modern video game industry. And Unity is a company with one of the most popular game engines on the market today. The company's tools can be used for PC games, mobile, VR, and even AR games with a toolset that doesn't require heavy coding, so its revenue is platform agnostic.

With revenue of $200.8 million last quarter, up 53.3% from a year ago, the company is still smaller than the video game companies I highlighted above, but it's growing much more quickly.

It's the platform Unity has built that will be valuable long-term, and it's stickier than any game by itself because Unity's customer is the video game developer.

The company is a little like AutoDesk in that it's building a suite of tools that can be used for a lot of projects. And like AutoDesk in engineering and architecture, Unity doesn't need to have every game be profitable as long as the video game industry overall is growing.

A bet on the tools of the future

Whether video games grow on mobile, VR, AR, PCs, or any other platform, Unity will be able to grow with the market. But its biggest strength may be enabling small developers with limited coding skills to build games that can reach a wide audience of customers. That will open the world of video games even more and put a tailwind behind Unity.

10 stocks we like better than Unity Software Inc.
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Travis Hoium owns shares of Unity Software Inc. The Motley Fool owns shares of and recommends Activision Blizzard, Take-Two Interactive, and Unity Software Inc. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.


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