The entertainment industry is booming, and video games and toys are two of the fastest-growing segments. The increasing popularity of mobile gaming, esports and the rising demand for interactive toys are all driving the growth of several industry participants.
Amid this backdrop, it could be wise to add fundamentally strong entertainment stocks Electronic Arts Inc. (EA), SciPlay Corporation (SCPL), and JAKKS Pacific, Inc. (JAKK) to capitalize on the global demand.
According to Statista, the number of video game users is expected to reach 3.1 billion by 2027. Revenue in the market is expected to grow at a CAGR of 7.9%, resulting in a projected market volume of $521.60 billion by 2027.
The rise of eSports, the growing popularity of mobile and online gaming, increasing internet penetration, faster connectivity through 5G, emergence of advanced technologies like Artificial Intelligence (AI), Augmented Reality (AR), and Virtual Reality (VR) are all contributing toward the growth of the gaming industry.
The global gaming market is expected to grow at a CAGR of 13.1% to reach $665.77 billion by 2030. Meanwhile, the esports market is expected to grow at a CAGR of 16.7% between 2022 and 2030.
Meanwhile, the toys and games market is expected to grow annually by 2.6 % over the next five years. Moreover, the demand for action figures has significantly increased, with children becoming more inclined toward interactive and self-engaging toys.
The increasing popularity of characters from films, comics, and TV shows further fuels this trend. As a result, the global action figures market is projected to reach $16.02 billion by 2030, registering a CAGR of 8.6%.
These statistics show that the entertainment industry is a large and growing market with a lot of potential for investors. Investors’ interest in gaming stocks is evident from the VanEck Vectors Gaming ETF’s (BJK) 16.2% returns over the past year.
Let’s take a closer look at the fundamentals of the featured stocks.
Electronic Arts Inc. (EA)
EA develops, markets, publishes, and distributes games globally for consoles, PCs, mobiles, and tablets, spanning genres like sports, FPS, RPG, and simulation, with titles like Battlefield, The Sims, and FIFA. The company licenses games to third parties, utilizing digital and retail channels for sales and distribution.
On August 16, EA introduced the EA SPORTS™ NHL® 24, arriving on October 6, 2023, for PlayStation®5, Xbox Series X|S, PlayStation®4, and Xbox One. The new addition could significantly add to the company’s revenue stream.
For the fiscal quarter that ended June 30, 2023, EA’s net revenue increased 8.9% year-over-year to $1.92 billion, while its gross profit grew 7.1% from the year-ago value to $1.56 billion. Net income increased 29.3% year-over-year to $402 million.
Also, its earnings per share came in at $1.47, representing a 32.4% increase year-over-year. In addition, its cash inflow from operating activities amounted to $359 million compared to the prior-year quarter’s cash outflow of $78 million.
The consensus revenue estimate of $2.35 billion for the fiscal third quarter (ending December 31, 2023) represents a marginal increase year-over-year. The consensus EPS estimate of $2.79 for the next quarter indicates an 11.5% improvement year-over-year.
EA’s trailing-12-month net income margin and ROCE of 11.78% and 11.93% are 226.8% and 262.8% higher than the 3.60% and 3.29% industry averages, respectively. Also, its trailing-12-month ROTA of 6.83% compares with the industry average of 1.54%.
The stock has gained 5.9% over the past six months to close the last trading session at $118.60.
EA’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
EA also has an A grade for Quality and a B for Value. It is ranked #3 out of 19 stocks in the Entertainment - Toys & Video Games industry. Click here to see the other ratings of EA for Growth, Momentum, Stability, and Sentiment.
SciPlay Corporation (SCPL)
SCPL is a developer and publisher of digital games on mobile and web platforms. The company operates in the social gaming market, offering a variety of social casino games such as Jackpot Party Casino, Gold Fish Casino, Quick Hit Slots, 88 Fortunes Slots, etc., and casual games comprising Bingo Showdown, Solitaire Pets Adventure, and Backgammon Live.
On August 8, Light & Wonder, Inc. (LNW) and SCPL announced that they have entered into a definitive agreement under which LNW will acquire the remaining approximately 17% equity interest in SCPL for $22.95 per share in an all-cash transaction. The management believes this transaction is a compelling opportunity to maximize value for SCPL’s shareholders and favorably positions both companies.
SCPL’s revenue increased 18.6% year-over-year to $189.90 million for the fiscal second quarter that ended June 30, 2023. The company’s operating and net incomes grew 18.8% and 28.2% from the year-ago values to $39.20 million and $41.40 million, respectively.
Also, its net income per share increased 8.7% year-over-year to $0.25. In addition, its adjusted EBITDA improved by 44.5% from the prior-year quarter to $59.40 million.
The consensus revenue estimate of $183.97 million for the third quarter (ending September 2023) represents a 7.7% increase year-over-year. The consensus EPS estimate of $0.23 for the current quarter indicates a 14.1% improvement year-over-year. The company has an impressive surprise history, surpassing the consensus revenue estimates in three of the trailing four quarters.
The stock’s trailing-12-month EBIT margin of 22.59% is 164.7% higher than the 8.53% industry average. Also, its trailing-12-month ROCE and ROTC of 21.11% and 16.17% compare with the industry averages of 3.29% and 3.49%, respectively.
SCPL’s shares have gained 75.9% over the past year, closing the last trading session at $22.67.
SCPL’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. It has an A grade for Value and a B for Quality.
Within the same industry, it is ranked #6. Click here to view SCPL’s ratings for Growth, Momentum, Stability, and Sentiment.
JAKKS Pacific, Inc. (JAKK)
JAKK is a multi-line, multi-brand toy company that manufactures and markets toys, consumables, and related products through two segments: Toys/Consumer Products and Costumes. Its offerings include action figures, toy vehicles, dolls, and accessories; infant and pre-school products; foot-to-floor ride-on products; role play and dress-up items; and kids’ indoor and outdoor furniture.
Recently, JAKK and Warner Bros. Discovery Global Consumer Products revealed a brand-new collection of adorable and collectible toy figures inspired by characters from the DC Universe. These articulated figures could attract strong demand as they are designed for interactive play and include a posing disk for a striking display. Each box is priced at $4.99 and is available at your nearby Target stores.
On May 3, JAKK and its costume division, Disguise, announced a multi-year partnership with Rooster Teeth and Joey Drew Studios to bring Bendy® to the world. The company would design, develop and manufacture action figures, plush, playsets, costumes, and costume accessories commencing in fall 2023. This should help enhance JAKK’s robust portfolio of video game licenses and costume lines further.
During the fiscal second quarter, which ended on June 30, 2023, net sales amounted to $166.93 million, while international sales increased 6.9% year-over-year to $23.95 million. Its gross profit margin improved by 310bps year-over-year to 30.7%.
Net income attributable to JAKK and EPS amounted to $6.45 million and $0.58, respectively. Additionally, its total current liabilities decreased 29.1% year-over-year to $175.71 million.
For the fiscal fourth quarter (ending December 31, 2023), JAKK’s revenue is expected to increase 9.1% year-over-year to $143.85 million. Its revenue and EPS for the fiscal year 2024 are estimated to reach $739.65 million and $4.01, registering 5.4% and 8.4% year-over-year growths, respectively. Additionally, it topped the consensus revenue and EPS estimates in three of the trailing four quarters.
In terms of the trailing-12-month net income margin, JAKK’s 9.57% is 128.7% higher than the 4.19% industry average. Likewise, its trailing-12-month ROCE and ROTA of 60.09% and 18.92% compare to the industry averages of 10.49% and 3.65%, respectively.
Over the past nine months, the stock has gained 11% to close the last trading session at $19.26.
It’s no surprise that JAKK has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value and a B for Sentiment and Quality. Out of 19 stocks in the same industry, it is ranked #4.
In addition to the POWR Ratings we’ve stated above, we also have JAKK’s ratings for Growth, Momentum, and Stability. Get all JAKK ratings here.
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EA shares were trading at $119.31 per share on Tuesday afternoon, up $0.71 (+0.60%). Year-to-date, EA has declined -2.03%, versus a 15.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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