By Ian Salisbury

While it hasn't been a great year for videogame makers, next year could be a lot better.

The videogame industry rode high during Covid-19, only to suffer over the past few years as Americans spent heavily on in-person activities such as concerts and travel. That led to layoffs across the industry, including at Take-Two Interactive and Electronic Arts.

Now, the sector's fortunes could be poised to change, according to Ned Davis analysts Pat Tschosik and Philippe Mouls, who recently recommended investors go overweight on the sector. "Once investors realize the post-pandemic bottom in video game sales and profitability is in place, a sustained rally should be expected," they wrote in a research note.

Ned Davis was particularly bullish on Take-Two Interactive, the owner of the mobile-gaming powerhouse Zynga and the popular Grand Theft Auto franchise. The company has struggled in 2024, returning about 14%, compared with about 26% for the broad market, but next year, it can count on the release of Grand Theft Auto VI. Due in the fourth quarter of 2025, it represents the first new installment of the flagship game in more than a decade.

That should help the stock. Take-Two shares have returned a median of 30% in the 12 months leading up to Grand Theft Auto releases, Ned Davis notes.

Of course, there are risks too. "The failure of GTA 6 would spell disaster given the high production cost," notes Morningstar analyst Michael Hodel.

Still, Tschosik and Mouls point out, other videogame makers have their own fresh offerings that could also help drive industry sales. French publisher Ubisoft plans an update to its popular Assassin's Creed franchise this winter, while Nintendo is expected to release a new generation of its Switch videogame console.

Meanwhile, longer-term growth and cost savings could be driven by videogames' increasing adoption of artificial intelligence. "In addition to basic code creation, generative AI can be used to create voices, music, artwork and to convert games to different languages," Ned Davis says.

Videogame makers aren't necessarily inexpensive. The Global X Video Games & Esports exchange-traded fund, the ETF that Ned Davis recommends, trades at 24 times the earnings expected for next year. That is above the broad market's 22, although not as high as tech stocks, which trade at 27.

Still, if the industry can score some big hits when new titles hit the shelves next year, the sector could be a winner for investors.

Write to Ian Salisbury at ian.salisbury@barrons.com

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December 23, 2024 14:30 ET (19:30 GMT)

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