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U.S. giants Activision Blizzard and Roblox have long been investor favorites for exposure to the video gaming sector, but Goldman Sachs has an alternative pick to play the sector. It comes after U.S. regulators said they were seeking to block Microsoft’s proposed aquisition of Activision on antitrust grounds . Shares in Activision are now trading at a roughly 20% discount to Microsoft’s offer of $95 a share. Meanwhile, Morgan Stanley recommended last month that investors should exit their positions in Roblox, downgrading the stock to underweight citing limited upside after a 37.3% surge in its market value this year. Alternative pick Against this backdrop, Goldman is betting on tech giant Tencent to play the sector’s rapid growth in China – the world’s largest online game market. “We believe Tencent continues to present favorable risk-reward to investors as it remains one of the most uniquely positioned amongst China Internet companies given its unrivaled WeChat eco-system, leadership in games and new growth drivers across video accounts, international games and [software as a service],” Goldman’s analysts, led by Lincoln Kong, wrote on Jan. 31. “While we acknowledge near-term revenue/profitability pressures, we believe Tencent is strengthening its leading positions across its business lines and is set for a revenue growth recovery from 4Q22,” he added. Tencent is expected to grow its game revenue by 9% annually into 2024, according to Goldman, with international gaming revenue making up about 30% of Tencent’s total revenue by 2030. The bank has a price target of 434 Hong Kong dollars ($55.30) on the stock, which implies potential upside of 13.3% to its Feb. 2 closing price. Despite its sharp rally of late, the stock is still trading below its historical 5-year average price-to-earnings multiple, Goldman noted. A multi-billion opportunity China’s online game industry has expanded to be the world’s largest game market with 650 million users and revenue of $45 billion in 2022, according to Goldman, citing data from games analytics provider Newzoo. While a number of factors have undermined global games revenue growth in 2022, Goldman expects the market to rebound by 5% and 7% in 2023 and 2024, respectively. As such, the bank said the industry is set for exponential growth into 2026 and has forecast global online game revenue to expand at a compounded rate of 4.4% annually to $284 billion in 2026. — CNBC’s Michael Bloom contributed to reporting
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