Stock markets around the world have been on something of a rollercoaster ride over the past few months.
One of the worst Decembers on record was followed by one of the best Januaries, so nobody really has a clue what to expect from February, but if you're an investor whose fortunes are tied up in stocks related to the games industry, the good news is that you've seen a lot of consistency. The bad news is that the consistent direction of travel has been downwards; just about every major games-related stock has spent the last four months in steady decline.
That decline was hastened this week by financial results from some of the industry's biggest players; platform holders Sony and Nintendo, and major publishers Electronic Arts and Take-Two Interactive. The contents of those results were somewhat mixed, and in any other climate would likely have resulted in a mixed set of share price adjustments.
"Investors seemingly fear that Fortnite's enormous gain is to the detriment of everyone else in the industry"
The current climate around game stocks is unusual, though. Investors are on edge and trigger-happy. Shares in all four companies have plummeted between 13% and 14% in the wake of their reports. Activision Blizzard, which won't report its results until next week, dropped 10% as well.
Those rapid price drops come off the back of months of decline for shares in all of those companies. Sony and Take-Two have both lost almost a third of their value since peaking in September, while Activision is down almost half. Nintendo's price peaked almost exactly a year ago and has dropped 40% since then. EA hit its peak last June and has lost 43% of its value in the intervening seven months. Other major companies across the industry have also seen declines, though not all are quite so significant.
The financial press has largely focused on a single culprit for these market movements -- namely the runaway success of Fortnite, whose annualised revenues are soaring into the $3 billion to $4 billion range. Investors seemingly fear that Fortnite's enormous gain is to the detriment of everyone else in the industry, Epic Games' juggernaut of a title sucking away attention and revenues from other companies' core games. In this narrative, the moderate downgrades of fourth quarter and full year projections by many of these companies serve as confirmation that many of their most dedicated consumers are absorbed in Fortnite instead.
"Why would Sony and Nintendo be caught up in a fears about Fortnite, when much of its success is happening on their platforms?"
I don't doubt for a second that some investors are genuinely running scared of Fortnite. We've seen similar things happen in the past when a major title achieved enough success to start being discussed in the mainstream media. World of Warcraft, which at its peak had 12 million players and somewhere between $1.5 billion and $2 billion in annualised revenue, provoked plenty of investor hand-wringing about the damage this could do to other companies' headline products. In reality, WoW's success grew the industry rather than eating everyone else's lunch, and Fortnite is likely to do much the same in the final analysis.
However, this fear of Fortnite's success doesn't adequately explain what's happening to game company valuations overall. For a start, why would platform holders like Sony and Nintendo be caught up in a fears about Fortnite, when much of its success is happening on their platforms? Indeed, Sony's share price freefall started around the point when it enabled cross-play for Fortnite, a much-demanded move which made PlayStation 4 into a more attractive platform for the hit game, while putting Fortnite on the Switch barely moved the needle on Nintendo's share price.
Moreover, Epic Games' parent company Tencent hasn't been immune to the general malaise -- while it faces some of its own growing pains, the point stands that its share price has also declined over broadly the same period of time. Take-Two's comprehensive beating of all expectations with sales of Red Dead Redemption 2 also doesn't exactly fit the narrative of Fortnite stealing all the consumers.
Fortnite might be part of the story, then, but it alone doesn't explain what's going on. Looking at the broader picture, it's obvious that as stock prices generally became unstable in 2018 -- which had some fairly wild swings over the course of the year -- the markets got risk-averse and bailed out of game related stocks. The real problem is that, as the markets picked up in January, game stocks didn't come along for the ride. Investors are still extremely wary of them, and oversensitive to anything that looks like bad news, whether that's a tweak to some projections or a headline about how the world's teens don't care about anything other than Fortnite anymore.
The reality is that if the market were being rational (which the market is not), it would recognise that the industry overall is in a pretty strong position but the companies which make it up are experiencing quite different fortunes. Take-Two's results confirmed that the company has finally managed to achieve Grand Theft Auto levels of success with another franchise, potentially laying the foundations for another ongoing source of revenue in the mould of GTA Online. Nintendo, despite a small downgrade in its hugely ambitious Switch sales projections, is back in Wii territory in terms of its platform's success, posted incredibly strong software sales and confirmed a 2019 line-up that's not only hugely promising, but also seems to be uncharacteristically on schedule.
"Right now there's a certain derangement around games as a sector, which vastly magnifies risk and overreacts to bad news"
Sony, too, didn't really have anything in its results that justified a further share price decline. The financial press focused on a slow-down in PS4 sales (8.1 million in the holiday quarter, compared to 9 million a year before), which is almost exactly in line with what you'd expect from a console at this late point in its life cycle.
These sales are actually declining more slowly than any console before it, and the strong uplift in PS Plus revenue suggests that the console's consumers remain very strongly engaged (hey, maybe Fortnite is helping with that), which bodes well for the future of the games division. Sure, coming up to a hardware transition increases risks around Sony, but those risks should be baked into the share price, not driving sudden 13% plummets or leading to the company losing a third of its value over four months, especially given its already low price-to-earnings ratio.
EA and the yet-to-report Activision Blizzard are in very different positions. I'd be tempted to say that the runaway success of RDR2 likely had more impact on the weaker-than-expected sales of Battlefield V than Fortnite did, but there's no question that EA is struggling to compete effectively with many of its core releases. It's not just that Battlefield V clearly didn't come off unscathed from a tough competitive match-up against RDR2, Assassin's Creed Odyssey and Call of Duty (which investors seem to suspect may also have suffered from the heightened competition); EA now has a fairly grim track record of underwhelming with major core releases, with Mass Effect Andromeda and Star Wars Battlefront 2 being especially notable on that front.
To its credit, EA has just launched arguably a major new challenger to Fortnite in the form of Apex Legends, but both that game and the forthcoming Anthem have an enormous amount to prove -- one could understand investors being wary until they actually start to see some positive results from those titles. Activision Blizzard also finds itself with much to prove, given concerns that it's resting too heavily on the long-in-the-tooth Call of Duty franchise (which makes it very hard to justify its eye-wateringly high PE ratio) -- but again, this isn't news as such, and investors seem to be reacting more to a prevailing attitude around video game stocks than to anything concrete regarding these companies.
For those invested in game stocks for more pragmatic reasons -- lots of employees of those companies own stock, for example -- this is a frustrating scenario, especially if you're invested in a company like Sony or Nintendo, which are both being hit hard despite generally performing very well. This is unfortunately a feature of how the markets work; right now there's a certain derangement around games as a sector, which vastly magnifies risk and overreacts to bad news.
In time, we'll probably come to see this as having been a great buying opportunity for shares in the more solid companies. But how much time that will take is very hard to say, because without some big events to change broad attitudes among investors, it's quite possible these stocks will continue testing new lows for a fair while yet.