Following the 2019 Electronic Entertainment Expo (E3), the video game industry’s biggest conference of the year, two things have become abundantly clear. Cloud gaming is the future of the gaming industry and that future is coming soon.
Cloud gaming is broadly defined as the ability to stream video games through the cloud, without any chunky hardware or lengthy downloads, and play those video games on any internet-connected device, like a smart TV, computer or smartphone. It’s basically Netflix (NASDAQ:NFLX), but for video games. Consumers pay a monthly fee to play video games through the cloud. And, much like Netflix uprooted traditional television due to its pricing and convenience advantages, cloud streaming services will uproot the traditional video game industry due to the same price and convenience advantages.
As such, cloud gaming is inevitably the future of the gaming industry.
That future is coming soon … very soon. At E3, many of the leading players in this industry announced that their cloud gaming services would have limited roll-outs later this year, and full launches in 2020. Thus, it seems inevitable that the video game industry in the early 2020’s will be one dominated by a shift from traditional video game consumption, to cloud gaming consumption.
The investment implication of that shift? Stocks on the right side of the cloud gaming shift should win big in the early 2020’s. With that in mind, let’s take a look at six cloud gaming stocks to buy to play this secular pivot.
Alphabet first announced its cloud gaming service, dubbed Stadia, in March. At it’s pre-E3 event, Alphabet divulged more details about Stadia. Broadly, there are two parts here. First, the hardware, which is just a controller to play the games. Second, the software, which is Stadia Pro and enables gamers to stream a library of video games to multiple devices. The controller costs about $70. Pro costs about $10 per month, so similar to Netflix pricing. The service presently supports about 30 games, but will grow over time. All of this is set for a limited roll-out in November 2019, and a full launch in 2020.
All in all, Alphabet is set to launch its true cloud gaming service Stadia later this year. That early launch will give Stadia a first mover’s advantage in this market. Further, Alphabet has a big enough data center network around the world that Stadia should be able to turn that first mover’s advantage, into a long-term advantage, meaning Stadia does project as an important player in the cloud gaming world at scale.
Is that a reason to buy GOOG stock? Yes. Cloud gaming will help lessen Alphabet’s reliance on advertising revenues, and broaden and lengthen Alphabet’s growth narrative. That will ultimately push GOOG stock higher.
Right behind Alphabet in the cloud gaming world is peer global tech giant Microsoft (NASDAQ:MSFT).
Microsoft just announced its Project xCloud, which is the company’s cloud gaming initiative that launches in October 2019 and allows gamers to stream Xbox games across a variety of different devices. Project xCloud is different from Stadia in many ways. First, we don’t have many details on xCloud. Second, xCloud is more of a cloud extension of Microsoft’s Xbox console than anything else. Third, the goal of xCloud isn’t to create a consolidated cloud gaming platform; rather, it’s to get gamers to play Xbox games more frequently across multiple different devices.
As such, xCloud in its current status will serve as a perfect cloud complement to the Xbox. Naturally, that positions xCloud to get a big early user base through current Xbox owners. Further, Microsoft has a large enough global hyper-scale data-center presence to support xCloud being arguably the best performing cloud gaming service in the world.
Will MSFT stock move higher because of xCloud? Perhaps. MSFT stock goes as its cloud businesses go and xCloud is a cloud business. Traction in xCloud could consequently excite the investor base, and push Microsoft stock higher.
There are four big tech companies with $700 billion-plus market caps. Three of them are jumping into the cloud gaming space. We’ve already talked about two of them: Alphabet and Microsoft. Now, let’s talk about the third — Apple (NASDAQ:AAPL).
Apple is jumping into cloud gaming with its Apple Arcade service. In short, Apple is taking all the best games in the App Store, putting them in a gaming library in the cloud, and allowing consumers to access that library for a monthly fee. That monthly fee hasn’t been announced yet, but will probably wind up somewhere around $10 per month. Also, gamers can access Apple Arcade on mobile or through a computer.
This is a big move for Apple. The company’s bread-and-butter, the iPhone business, is running out of growth runway. Apple is rapidly pivoting into the software and services space to help offset slowing hardware growth. This pivot is working … to a degree. But, it will work a whole lot better if Apple can successfully turn Arcade into a mobile/PC gaming equivalent of Netflix.
Is that possible? Sure. Apple has huge market share in smartphones and computers, and they will leverage that huge physical presence to help push their software services, which should increase adoption and help these relatively new services scale quite quickly. As Arcade does scale quickly, the Services business will get a boost, and AAPL stock will move higher.
Electronic Arts (EA)
The dark horse in the cloud gaming wars is video game publisher Electronic Arts (NASDAQ:EA), which announced its cloud gaming platform Project Atlas back in 2018.
Details on Project Atlas are scant, and from a media coverage and announcements perspective, it seems to have fallen behind Stadia, xCloud and Apple Arcade. Nonetheless, EA has a leg up here because it is a video game publisher that owns the content that many gamers want to play. As we’ve seen with Netflix and the video streaming wars, content is everything. Thus, EA comes into the cloud gaming world with a winning hand.
Will that winning hand help EA create a market-leading cloud gaming platform? Perhaps. We still don’t know what this market will look like in the future. But, we do know that whatever the market does end up looking like, EA will be a part of the picture, either as a cross-platform content provider, or a cloud gaming platform owner.
Either way, the cloud gaming pivot is a good thing for EA. It will push revenues higher, increase revenue visibility and help expand the multiple on EA stock. All three of those things will help move EA stock higher in the long run.
Advanced Micro Devices (AMD)
The first four companies on this list were potential providers of cloud streaming service. This fifth company, however, is the chip giant that is powering those cloud streaming services behind the scenes.
Advanced Micro Devices (NASDAQ:AMD) is a CPU and GPU company that services many different end markets. One of those end market is gaming. AMD does pretty well in gaming with its GPU chips. For example, the company’s GPU chips have long been the fuel behind Microsoft’s Xbox gaming consoles. Now, as tech giants are pivoting their gaming services to the cloud, many of them are tapping AMD to power their cloud gaming platforms, too.
Namely, Microsoft’s xCloud streaming service and Alphabet’s Stadia streaming service will both be built on AMD GPUs. Those are the two premiere, leading cloud gaming services, and both of them are tapping AMD for their GPU power.
That’s impressive. If AMD can maintain this trend of being the go-to GPU power behind the cloud gaming industry, then AMD’s revenues and profits will see a nice lift. That nice lift could provide an equally nice lift to AMD stock in the long run.
Last, but not least, in this list of relevant cloud gaming stocks to buy is Nvidia (NASDAQ:NVDA), the chip giant that has dual exposure to the cloud gaming market.
On one end, Nvidia has already built its own cloud gaming service, called GeForce Now. According to most accounts and sources, GeForce Now is probably the best cloud gaming service out there right now. But, it’s limited. It focuses exclusively on computer games, and is in a beta, invite-only phase. Nvidia has not mentioned any intentions to open the floodgates for GeForce Now. As such, while Nvidia has built one of the world’s best cloud computer gaming platforms, that platform isn’t set for a commercial roll-out just yet.
Perhaps that’s because on the other end, Nvidia makes the GPU chips that are the building blocks for cloud gaming services. Nvidia has long been considered the king of the GPU market, and king of the data-center market. Naturally, that positioning makes them seem like the obvious choice to power cloud gaming platforms.
Net net, Nvidia has established dominance in the markets which are the fundamental building blocks for cloud gaming. In the long run, Nvidia will either leverage that dominance to build the best game streaming platform, or be the best provider of game streaming building blocks.
Is this a big deal for NVDA stock? Absolutely. Nvidia’s long-term growth narrative is all about cloud, AI and data, and cloud gaming is a big part of that narrative. As such, cloud gaming should be one of the many reasons why NVDA stock heads higher in the long run.
As of this writing, Luke Lango was long NFLX, GOOG, AAPL, EA and NVDA.
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