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The stock market is down
Mass unemployment? The worst recession since the 1930s? Pfff, said game actions.
As record-breaking layoffs sweep across the nation, US gaming giant Activision Blizzard
Headline with Activision Blizzard
As you’ve probably heard, gaming stocks have been on fire during Covid. And now that the world is closing in again, investors are scratching their heads in search of the next gaming hit.
But choosing these actions one by one could be a gamble. And if you are betting on games, there is a much safer and more predictable way to invest in this industry.
I’m talking about Sony (SNE).
The Japanese tech giant has placed itself in a unique position to raise billions of dollars from most gaming companies over the next year. I’ll tell you all about it in a moment, but first some background.
Sony makes the world’s most popular console
You may know Sony by its logo on your television or hi-fi speakers. And you’ve probably seen “Sony Pictures” go by during a movie’s opening sequence. But unless you like video games, you might not know that Sony is a great thing at games too.
You see, Sony makes the Playstation, the most popular game console in the world.
Since 1994, the company has sold more than 500 million consoles. None of its rivals, Nintendo or even Microsoft
But the thing is, Sony doesn’t earn a penny from consoles. In fact, every time your console rings at a cash register, Sony misses money. For example, Sony has reportedly been losing $ 60 on every sale of its PS4 flagship.
The logic is simple. The company is short-selling its consoles so that more of them make it into people’s homes. Then make a fortune by selling games and subscriptions to them.
Sony is the apple
When you get a console, you will obviously need something to play on it. And this is where the gears of Sony’s profit machine begin to turn.
For starters, the Playstation console comes loaded with a store where you can buy just about every game on this planet. Every time a purchase is made from this store, Sony gets a cut.
But games are usually not enough.
For example, you need a subscription to “Playstation Plus” ($ 59 / year) if you want to play online. And you have to sign up for “Playstation Now” (another $ 59 a year) to stream your gaming sessions live.
(FYI: watching others play is one thing nowadays.)
In other words, think of Sony as the Apple of games. Just as Apple uses the iPhone to get most of its money from apps and services, Sony hands you a console at a loss knowing that it will become a powerful subscription and game sales tool.
And this business model is making a big impact on Sony.
Last week, Sony reported earnings for the July-September period. Exceeding Wall Street expectations, its subscription and games soared 40% to an all-time high. They now make 2x more profit for Sony than any other line of business. Have a look:
Sony Operating Income (SNE) by Segment
Sony launches what could be the most successful console in its history
On November 12, Sony will launch its next-generation console, Playstation 5 (PS5). Y pre-orders hint that PS5 may be Sony’s biggest hit since 1994. For the first 12 hours Sony got more pre-orders than its previous best-selling PS4 sold in 12 weeks.
Record demand for Sony’s long-awaited console means that people will go shopping for new games in droves. And with an impressive roster of game titles on PS5, Sony is very positive about the year ahead.
In its earnings report, Sony said they expect their game sales to grow 26% next August. If they hit the mark, that would mark one of the most successful early years for Sony’s console.
Why Sony Might Be a Better Buy Than Other Gaming Stocks
The other day I was talking to a 15 year old boy and I asked him about Fortnite.
Fortnite was the sensation of 2018 that brought more than 125 million people to their computers. At one point, people were talking about the game. Even rapper Drake and celebrity host Ellen gave it a twist multiple times.
Do you know what that boy told me? “Is dead.”
Moral of the story: Gaming crazes come and go, and your selection of game actions could be either a big hit or a big miss. See what happened to Activision Blizzard when its main game franchise Call of Duty fell in 2018 (Spoiler: -28%)
So why take a chance when there’s Sony?
It’s the undisputed king of consoles with a strong track record of making juicy royalty earnings from more than 80 game companies, including Activision Blizzard, Sega, and Disney’s Lucas Arts. And its PS5 pre-orders indicate that Sony won’t let go of its console supremacy anytime soon.
PS: I’m researching Microsoft (MSFT), which is doing something that could be the next big thing in mobile gaming. I’ll tell you about it next week.
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This is not investment advice.
