The stock market remained volatile on Tuesday, and the Nasdaq Composite (NASDAQINDEX:^IXIC) had to deal with some dips in the road early on before recovering. As of 12:30 p.m. EDT today, the Nasdaq was up about 0.2%, although it still lagged behind other major market benchmarks.
The biggest companies in the Nasdaq managed to post modest gains that helped the overall index. But more surprising was the damage across an entire industry that holds a prominent place among Nasdaq stocks. Video game makers have been big winners over the years, but most of their stocks saw big declines today. Below, we’ll share the details and look at what’s behind the downward move.
Pressure on gamers
The biggest decline in the industry came from Take-Two Interactive Software (NASDAQ:TTWO), which released its fiscal first-quarter financial results late Monday. The 9% drop in the stock stemmed from slower growth than expected and concerns about delays in releasing the next installments of some highly anticipated core game titles.
But the declines weren’t company specific. Activision Blizzard (NASDAQ:ATVI), which releases its own earnings after the closing bell this afternoon, fell almost 5%. Investors have been somewhat pessimistic about the game maker’s prospects, especially because some of Activision’s most popular franchises won’t see major new releases until later in 2021. The company is expected to see bookings decline and only a modest rise in earnings per share.
Electronic Arts (NASDAQ:EA) will also join the earnings parade with its own report on Wednesday, Aug. 4. EA previously guided for just a 1% rise in year-over-year revenue for the quarter, but investors are hopeful that the company will keep seeing its earnings rise. Nevertheless, the stock was down more than 3% Tuesday afternoon.
A cold wind from China
China has always been a powerhouse for video games, and so recent proclamations from the Chinese government characterizing them as “spiritual opium” has come as a shock to the industry. Major players in China’s video game industry have seen huge declines Tuesday. NetEase (NASDAQ:NTES) fell more than 11%, while Tencent Holdings (OTC: TCEH.Y) saw a 7% drop.
Government officials in China have been increasingly critical of internet-based companies, but most of their attention until now had focused on broader-based companies with more of a mainstream media presence. That made sense, given those companies’ ability to be vehicles for those with dissenting opinions to express their views.
Now, with video game companies proving vulnerable to central regulatory targeting, it’s apparent that China’s crackdown on highly profitable companies is expanding. Video games are a much more nuanced mode of expression than streaming video or news reporting, but the government apparently sees the capacity for gaming to introduce external values that are contrary to its policy directives. That would have an adverse effect on the government’s efforts.
Playing the long game
Long-time investors in video game stocks have seen these cycles play out before. China is notably volatile, but when its moves threaten the nation’s economy, the central government often pulls back from more extreme measures. Similarly, while U.S. game makers go through lulls without major product releases, sales pour in when new games finally go to market.
Declines in video game activity were almost inevitable once pandemic-related lockdowns started to ease. But in the long run, video games remain a key part of the future of entertainment, and that makes their stocks attractive long-term plays for investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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