Mobile-gaming companies look like a classic deep-value opportunity that would make Benjamin Graham proud. The EBITDA multiples of mobile-gaming companies have decreased significantly, now trailing by more than threefold compared with broader companies in the mobile sector. From the COVID era, these valuations have not only dropped but also are below pre-COVID levels, currently trading at a 72% discount relative to the PC/console gaming sector. Additionally, value stocks, including many in the gaming industry, remain out of favor with investors, underperforming growth stocks by about 30% for the year to date.
Investors’ cautious attitude toward mobile-gaming companies is easy to understand. After many years of strong growth and the COVID-driven last-hurrah expansion, the industry suffered two consecutive years of decline. The mobile-gaming market contracted after being hit by Apple ATT policies and post-COVID normalization in 2021. Gaming studios shut down, and employees were let go.
While no silver bullet against the privacy changes was discovered, gaming companies found work-arounds. In 2024, mobile gaming is expected to resume growth. Recently released Monopoly Go became the fastest mobile game ever to gross over $3 billion.
On top of that, the structural drivers are still intact. Ongoing global smartphone adoption, which is expected to grow by midsingle digits, benefits from the generation shift, as games are more popular among younger audiences (94% of Gen Alpha and 86% of Gen Z play games). The worsening mental health situation globally is also a tailwind, as games tend to help people cope with anxiety and social isolation.
One could say that investing in mobile gaming could be a way to boost exposure to a growing market with structural long-term tailwinds at a bargain price. What is not to love about it?
Internal and external competition
For every cyclical sector of the economy, it is common to experience occasional crisis periods. After a party always comes a hangover and after a period of explosive growth, normalization. During such periods, weaker and inefficient players leave the market and clear the path for more efficient ones, which adapt to the new reality and become stronger. Usually, a market decline helps reduce competition, driving margins higher for the remaining participants.
This is exactly what happened in the direct-to-consumer e-commerce space, which rebounded strongly in 2023-24 after being hit in 2022 by factors similar to those that affected mobile gaming.
To some extent, a consolidation took place in mobile gaming. A number of smaller studios were closed or acquired. Large studios gained market share through some strong releases — like Monopoly Go. Such studios have strong balance sheets and/or deep-pocket backers. It would be reasonable to expect that such consolidation would lead to less intensive competition for players and moderated customer acquisition costs (CACs) or costs per install (CPIs).
But this is far from being correct. Judging by Facebook's CPI growth, the competition for app users has not only failed to pause but also keeps growing fast. Facebook CPIs are growing by double digits, significantly outpacing mobile-gaming market dynamics.
One of the reasons could be lying outside mobile gaming. It turned out that while gaming apps are struggling, nongaming applications are experiencing a renaissance. Less than 10 years ago, nongaming apps accounted for just 15% of overall application spending by consumers. Now they are almost as big as mobile games, and their revenues keep growing much faster. These apps compete for the same audience that mobile games do.
Nonmobile apps consist of startups and scale-up products as well as applications launched by big enterprises. Many app-based companies backed by venture capital got funded lavishly during the VC bonanza in 2021, and many generative artificial intelligence products that took off in 2023 also have applications.
Also, some big retailers launched apps on the back of the rising mobile e-commerce trend. A good example is the Temu app, with a leading position in U.S. app stores. The nongaming-apps sector is an 800-pound gorilla in the room, which is hard to ignore.
A case in point is Applovin’s recent decision to go after the e-commerce app market. Investors seem to agree that the potential is huge, as the stock price nearly doubled almost instantly after this announcement. Specifically, the price jumped from a closing value of $168.55 on Nov. 24, right before Applovin’s earnings report, to a local peak of $401.50 on Dec. 6, representing 138% growth. This shift highlights the company’s ability to earn substantial commissions from mobile apps, further intensifying the already fierce competition within the gaming sector.
What is next?
The mobile-gaming industry is definitely not out of the woods. The elevated CPIs seem not to go anywhere. And the most effective ways to cope with them are available only for larger players with considerable financial resources, large team sizes and broad title portfolios.
Such an environment is conducive to market consolidation. So chances are, the ongoing M&A activity in the sector will continue. Smaller studios will be bought out by larger ones, and big companies will merge to unlock synergies and consolidate resources. The wave of studios shut down is also unlikely to be over. As a result, we will probably see much fewer but stronger mobile-gaming companies with higher competitive moats.
Also, an impact related to nongaming apps could cool down the competition. A global economy shock would likely cause a sharp reduction in the marketing budgets of many application-based companies. Consumer spending will be lower, and VC funding conditions will be much tighter during a recession. In this situation, gaming companies will suffer as well. But the chances are that the negative effect on gaming would be softer. Mobile games are still one of the cheapest entertainments available, if measured per hour, and could be a good way to escape the anxiety and depression that usually come with economic downturns.
The good news is that the current multiples in the sector look unsustainably low. After all, a high-quality mobile-gaming company typically enjoys sticky customers, durable revenue growth and stable cash flows. And whatever companies survive the current crisis, most likely, their valuations will be much higher than they currently have been.