Did gaming live up to the Covid-era promises?

Five years ago, the world was a weird place. The initial shock of Covid had festered into a long and painful journey for just about everyone, with “family meetings” and uncertainty over when (and if) people would return to the office.

For those who were lucky enough to avoid being obliterated financially, this was an opportunity to stay home, stay safe and stay online.

Numerous technology businesses achieved accelerated growth and user adoption as a result of the pandemic. In the gaming sector, these were exciting times as consumers invested in both hardware and software. Valuation multiples ran high and punters took advantage of low interest rates to put more money into the market.

History has taught us that many of the Covid boom stocks turned out to be awful choices for investors. Zoom is still languishing at nearly 90% off its pandemic highs. Peloton has shed more than 95% of its value. While the fads severely hurt investors, there were other companies that recovered from the interest rate shocks in 2022 and eventually pushed beyond their pandemic levels, such as Netflix, which is up about 65% vs its pandemic peaks. Such is the nature of disruptive forces: the strong will flourish and the weak will flounder.

In this washing machine of technology stocks, did the gaming sector make it out in one piece? Or did it get stuck in that mysterious dark hole around the seal, with the socks and the Peloton-esque casualties?

There’s an ETF for that

One of the best ways to take a quick-and-dirty view is to find the thematic ETFs that target this sector. There has been a proliferation of ETF products on the global stage, featuring highly marketable names and stock tickers as product providers fight for investors’ attention. This competitive bunfight will be familiar to video game companies, but more on that later.

The largest example in the gaming context is the VanEck Video Gaming and eSports ETF, which trades under the clever ticker $ESPO. The top holdings are Tencent Holdings, Nintendo and Electronic Arts (EA). Other names that feature are NetEase, Take-Two Interactive Software, Roblox and Konami Group. The second-largest ETF is the Global X Video Games & eSports ETF with the ticker $HERO. You won’t find Tencent anywhere on the list of top holdings. Instead, EA, Konami and Take-Two make up the top three, with Nintendo and NetEase in hot pursuit.

The difference in performance is astonishing (and not attributable to Tencent). $ESPO has grown 82% over five years, while $HERO isn’t living up to the name at all, up just 18% over that period. For comparison, the S&P 500 — a far more diversified play and thus less risky — has grown roughly 90% over the same period. This means that the gaming sector has underperformed the broad market, a surprising outcome given where the world was five years ago. The tech-heavy Nasdaq-100 drives the point home even further, up 115% over that period.

The period of comparison makes a big difference, of course. A cooling-off in sentiment towards AI and big tech in general means that the year-to-date performance of the gaming ETFs is far ahead of the broad index. $ESPO and $HERO are each up by about 36%, while the S&P 500 has done 16% and the Nasdaq-100 has managed 22%. There’s more to it than that, as there are other signs that the gaming sector is ready to start growing again after the post-pandemic correction. In thematic ETFs, as in single stocks, the timing of entry is important.

But why has the gaming sector underperformed the market over the longer term? There was so much promise being shown during the pandemic, with some blockbuster deals along the way, like Microsoft’s acquisition of Activision Blizzard. There’s the “kidult” trend as a major underpin, as the gaming sector targets adults as much as children. There are other tailwinds, such as global access to broadband internet and smartphones, along with an overall geek-friendly era of online content creation and communities that have formed around specific games.

If we dig into recent company announcements and strategic pivots, we find clues as to why gaming has struggled to live up to its promises.

More gamers, much more competition

According to Take-Two’s financial reporting (and stats that it quotes from Sensor Tower), there were 3.3-billion global video game players in 2024. This is spread across the entire industry and all devices. For context, Meta has 3.5-billion daily active users in its Family of Apps business. In other words, Meta has more users in its ecosystem than the video gaming sector enjoys as a whole!

This creates a hotbed of competition across titles and devices. To make it worse, the gaming houses aren’t just competing with one another — they are also competing with just about every other form of entertainment you can think of, including the rise of online sports betting and gambling on the global stage.

How does this competition play out in practice? It all comes down to having not just the strongest IP, but also the ability to keep delivering great products over time. Global standards just keep going up, with the lines becoming increasingly blurred between whether games are for playing or for watching.

There’s no better example of this than Take-Two. Subsidiary Rockstar Games owns the incredibly valuable IP for Grand Theft Auto, one of the most successful gaming franchises of all time. This puts pressure on it to keep delivering exceptional products and push the boundaries. This equates to a dangerous cocktail for investors: vast development budgets and a high likelihood of not just cost overruns but also delayed releases.

Who knew that playing football games on PlayStation would attract such politically connected interest?

The market looked right through the recent results at Take-Two and focused on the bad news: a delay to Grand Theft Auto VI, the most expensive video game yet developed. Development reportedly began more than 10 years ago, in 2014, though reports suggest that full production (in other words, the entire studio working on one project) started in 2020. The trailer eventually dropped in 2023, promising a game launch in 2025. We now know that the game will only be available in November 2026, just in time for Black Friday and Christmas, of course — but a year later than anyone expected.

This awkward situation is made worse by Take-Two reporting negative cash from operations in both the 2024 and 2025 financial years. It may have swung positive over the first half of the 2026 financial year, but not by much. Capital expenditure ($57m) still looks very high relative to cash from operations ($84m).

Despite the best efforts of the management team to distract the market from the delay, with gushing commentary about net bookings and an upgrade to 2026 guidance, the market wasn’t having it. The share price fell more than 8%, an outcome that would probably have been worse if not for management just about hiring a praise singer to write its prepared comments.

Despite the dip, the share price is up 28% year to date. There are clearly some positive factors at play here, as evidenced by the sector outperforming the broad index this year.

But what are they?

Hello, mobile

In the same way that big tech pivoted their business models from one-off purchases to software-as-a-service, so gaming houses jumped on the bandwagon and learnt about in-game purchases and recurring revenue.

This is particularly true in mobile gaming, with Take-Two giving us a clear view on this thanks to its acquisition of mobile-focused Zynga in 2022. Here’s a stat worth noting: recurring consumer spending at Take-Two was $4.5bn in FY24, almost double the $2.3bn in FY21 (before the acquisition). More than 75% of revenue at Take-Two is now recurring in nature. You can see why it made the leap into the mobile space, as the idea is to create a smoother revenue profile while it works on generation-defining releases.

Whether the Zynga acquisition for $12.7bn will turn out well for shareholders is debatable. The subsequent write-offs of intangible assets through the income statement have crushed profitability at Take-Two, with net losses as a feature rather than a bug at the group. It just needs investors to keep believing in the long-term story, which is exactly why the delay of Grand Theft Auto VI is such a concern.

It doesn’t help that the Zynga acquisition was done at the top of the cycle. Sensor Tower’s State of Mobile 2025 report suggests that mobile gaming “bounced back” in 2024, with revenue from in-app purchases growing for the first time since 2021 on a year-on-year basis. You can therefore see why the acquisition didn’t pay the big bucks initially.

It seems as though the bottom is in, with mobile revenue having fallen from $86.8bn in 2021 to $78bn by 2023. It’s interesting to note that the 4% growth in mobile revenue in 2024 to $80.9bn was achieved despite a 6% decline in mobile downloads. This speaks directly to increasing spend per user, with strategy games contributing 21.4% of revenue and only 4% of downloads. In case you’re wondering, the biggest disconnect in the other direction can be found in the simulation and arcade categories, which contribute 20% and 19% of all downloads, but only 7.4% and 2% of revenue respectively.

Mobile is growing again, which is good news for a large number of players in the sector — including every South African’s favourite Chinese technology play, Tencent. Naspers/Prosus will hopefully keep putting those profits to good use.

The deals continue

With the Microsoft-Activision Blizzard deal that captured the imagination of investors (and unfortunately global regulators) firmly in the rear-view mirror, there’s a new megadeal to focus on: in September, EA announced the largest leveraged buyout in history. The $55bn deal has investors including the Saudi Arabian Public Investment Fund and Affinity Partners, led by Jared Kushner, US President Donald Trump’s son-in-law.

Who knew that playing football games on PlayStation would attract such politically connected interest?

At $210 per share, this is a 25% premium to a price that had already put in a strong run this year. As recently as January 2025, shares were changing hands on the market at $115. The timing of the deal certainly cannot be described as opportunistic.

The Saudis haven’t been shy to throw money at anything vaguely resembling “fun” recently, looking to diversify from oil and improve their global image. This isn’t exactly the optimal investment thesis from a financial perspective. Much of the commentary from the other investors has come with a flavour of childhood nostalgia for the games — another dubious justification for a deal. Being passionate about what you’re buying is important, but EA has been a sideways financial story for the past couple of years and the share price lacked meaningfully positive momentum until buyout rumours started circulating.

Looking ahead

The next five years will certainly be affected by AI. For better or worse, we can’t be sure yet. Some of the biggest names in gaming will now be supported by almost bottomless balance sheets, while others will have to keep the pot boiling on public markets where shareholders can easily run out of patience.

Will mobile gaming continue to grow, supported by in-app purchases? Or will other online entertainment disrupt the market?

But perhaps the biggest question of all is this: will Grand Theft Auto VI actually come out in 2026? Stay tuned.