Massive unemployment? The worst recession since the 1930s? Pfff, said gaming stocks.
While record-level layoffs sweep the nation, America’s gaming giant Activision Blizzard
As you’ve probably heard, gaming stocks have been on fire during Covid. And now that the world is shutting down again, investors are scratching their heads in search of the next gaming hit.
But picking these stocks one by one could be a gamble. And if you’re betting on gaming, there’s a much safer and more predictable way to invest in this industry.
I’m talking about Sony (SNE).
The Japanese tech giant has put itself in a unique position to collect billions of dollars from most of the gaming companies in the coming year. I’ll let you all about it in a moment, but first some background.
Sony makes the world’s most popular console
You might know Sony from its logo on your TV or hi-fi speakers. And you’ve probably seen “Sony Pictures” flash by during the opening sequence of a movie. But unless you are into video games, you might not know that Sony is also a big thing in gaming.
You see, Sony makes Playstation, the world’s most popular gaming console.
Since 1994, the company has sold more than half a billion consoles. None of its rivals—Nintendo or even Microsoft’s
But the thing is, Sony doesn’t make a penny from consoles. In fact, every time its console rings a cash register, Sony loses money. For example, Sony has reportedly been losing $60 on every sale of its flagship PS4.
The logic is simple. The company is selling its consoles short to get more of them into people’s homes. Then later it earns a fortune selling them games and subscriptions.
Sony is the Apple
When you get a console, obviously you you’ll need something to play on it. And this is where the gears of Sony’s profit machine start to whir.
For starters, Playstation’s console comes loaded with a store where you can buy nearly every game on this planet. Every time a purchase comes through this store, Sony gets a cut.
Sony also makes money from licensing its gaming “platform” to developers. That means gaming companies have to pay a fee to Sony even if they sell a CD copy, say, at Walmart
But games are usually not enough.
For example, you need a “Playstation Plus” subscription ($59/year) if you want to play online. And you have to sign up for “Playstation Now” (another $59 year) to stream your gaming sessions live.
(FYI: watching others play games is a thing today.)
In other words, think of Sony as the Apple of gaming. Just like Apple uses the iPhone to make most of its money from apps and services, Sony hands you a console at a loss knowing it will become a powerful selling tool for subscriptions and games.
And this business model is making a killing for Sony.
Last week, Sony reported earnings for the Jul-Sep period. Blowing past Wall Street expectations, its subscription and games soared 40% to an all-time record. Now they pull in 2X more profits for Sony than any other line of business. Take a look:
Sony is launching what could be its most successful console ever
On November 12, Sony is shipping out its next-gen console, Playstation 5 (PS5). And pre-orders hint that PS5 may be Sony’s biggest hit since 1994. During the first 12 hours, Sony pulled in more pre-orders than its previous best-seller PS4 sold in 12 weeks.
Record demand for Sony’s long-awaited console means people will go shopping for new games in droves. And with an impressive lineup of game titles coming up on PS5, Sony is very positive about next year.
In its earnings report, Sony said they would expect their gaming sales to grow 26% by next August. If they hit the target, that would mark one of the most successful first years of Sony’s console ever.
Why Sony could be a better buy than other gaming stocks
I was talking to a 15-year-old the other day and asked him about Fortnite.
Fortnite was the 2018 sensation that glued 125+ million people to their computers. At one point, the game was all people talked about. Even rapper Drake and celebrity host Ellen gave it a whirl a few times.
You know what that kid said to me? “It’s dead.”
Moral of the story: game manias come and go, and your gaming stock pick could be a big hit or a big miss. See what happened to Activision Blizzard when its top game franchise Call of Duty tumbled in 2018 (Spoiler: -28%)
So why take chances when there’s Sony?
It’s the undisputed king of consoles with a strong record of earning juicy royalties from 80+ gaming companies—including Activision Blizzard, Sega, and Disney’s Lucas Arts. And its PS5 pre-orders signal that Sony is not letting go of its console supremacy anytime soon.
P.S. I’m looking into Microsoft (MSFT), which is doing something that could be the next big thing in mobile gaming. I’ll tell you about that next week.
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This is not investment advice.