Sunday, February 25, 2024
Stock Market

The Biggest Challenges Facing Video Game Stocks in 2024

Last year was a very mixed year for video game stocks. The industry went through a tumultuous year of labor and sectoral upheaval. From unionization efforts, massive acquisitions, and the sudden rapid rise in interest in artificial intelligence (AI), there were a lot of challenges facing video game makers. And, for the most part, the industry weathered the storm, or at least their stocks did. However, three challenges hang over video game stocks in 2024 that will decide the industry’s winners and losers.

Video game stocks, like the industry itself, have never quite had the prestige of their pure(er) play counterparts in the tech and entertainment worlds like Apple (NASDAQ:AAPL) or Netflix (NASDAQ:NFLX). But despite this, every single member of the FAANG (or MAMAA as the group now informally goes by) has invested into the sector to some extent. Not to mention, every single growth metric for the industry points upwards. Still, investing in video game stocks can be tricky as they’re highly dependent on products and services that are quite variable in nature, particularly in quality.

Video Game Stocks: New Year, New (and Old) Challenges

Two of the largest exchange-traded funds (ETFs), the VanEck Video Gaming and eSports ETF (NASDAQ:ESPO) and Global X Video Games & Esports ETF (NASDAQ:HERO), provide a mixed picture of the industry’s performance in 2023. The former ended the year up over 15%, and the latter down 1.5%. And looking back at ESPO’s extremely poor performance in 2021 and 2022 shows how well the industry has rebounded from a dreadful post-pandemic slump. However, this rebound has been a pyrrhic one.

The industry is entering the new year on rough ground. Interest rates are still high, which puts pressure on capital. Labor pressures, from unionization efforts to rising wages, are shaking up the labor market. Top it all off with AI advancements offering tantalizing and revolutionary changes to how the industry operates. These last two issues in particular, labor and AI, are where the industry is at a turning point this year. Companies that can best manage these two factors while still putting out quality products will most likely see their respective stocks fly up the leaderboards.

The Federal Reserve vs. the Video Game Industry

The video game industry is where the highly technical field of software programming meets artistry. A video game company is, at its core, both a tech company and an entertainment company at the same time. Take Electronic Arts (NASDAQ:EA) for example. It was founded with this concept in mind, hence its name.

However, two industries tend to suffer the most when “cheap money” (aka loans with low interest rates) dries up: tech and entertainment. The former generally needs startup money as it is a capital-heavy industry. And the latter’s discretionary nature with consumers hurts it on the other side of the equation. When the Federal Reserve started hiking interest rates in 2022, the video game industry was beginning to get back on its feet after a post-pandemic slump. As the interest rate hikes continued and dragged into 2023, we started to see many tech and entertainment companies enact layoffs and restructurings. As one might expect, the video game industry was also hit hard by layoffs.

One independent developer who saw the “dark clouds” forming in 2022 described 2023 as the “year of hell.” They had spent 2022 losing a publisher, who’d gone through a large round of layoffs, and spent 2023 trying to find a new one. After about a year of searching and 90+ publishers, they were still in the wind. The message their company received throughout the search was quite clear: “Money is too expensive right now, and frankly, we don’t have any.”

And then the AI boom began.

Industry vs. AI

When it comes to video games, “AI” has long been a shorthand for “bots” or nonplayer characters (NPCs). Humans have played against this relatively rudimentary AI created by game designers and programmers for decades. Yet, like a cliché sci-fi story, the tables have turned, and AI appears to be coming for the industry’s humans.

For example, chip industry titan Nvidia (NASDAQ:NVDA) recently announced an expansion to its Ace Production Microservices. The service’s headlining feature is an AI-powered game-making tool. Essentially, the tool allows developers to create fully voiced and responsive NPCs using Ace’s generative AI systems. To big names like Ubisoft (OTCMKTS:UBSFF) and Tencent (OTCMKTS:TCEHY), which have already signed up for this service, this probably sounds like a splendid cost-saving technology.

On the other hand, to the character designers, artists, and, most notably, the voice actors (VAs) that bring NPCs to life in games, using AI like this is, at best, another attempt to cut corners and, at worst, a threat to their craft and livelihoods.

For consumers, there’s also the concern about quality. Both Ubisoft and Tencent already have notorious reputations for poor quality and a lack of creativity. It is unlikely that introducing generative AI, a technology that, in its current state, has been deeply tied to plagiarism, will allay customers’ concerns about quality and originality.

Industry vs. Labor

Caught in between an industry grappling with both macroeconomic conditions and artificial intelligence is the labor that drives it all. Last year was rough on both the entertainment and tech labor markets, so the video game industry’s workforce was hit particularly hard.

 Unfortunately, this year looks like it is going to be much the same.

January isn’t even over yet, and already names like Unity (NYSE:U), Amazon (NASDAQ:AMZN), Playtka (NASDAQ:PLTK) and Discord have all announced layoffs. And they’re not alone; every week, it seems another video game company is announcing a round of layoffs.

Amazon’s layoffs revolved around its Audible, Prime Video, and, most relevantly, Twitch departments. The latter is the most popular live-streaming service in the world and frequently hosts major video game tournaments and live streams.

Unity’s layoffs come after an incredibly rocky year that involved numerous controversial decisions. An announcement of the incorporation of generative AI tech in June helped the stock pop, but then an extremely unpopular and controversial royalty fee change later in the year led to the stock cratering and the CEO resigning. Now, the game engine firm is laying off a whopping quarter of its staff.

AI vs. Labor

During last year’s writers and actors strikes, a lot of attention was focused on where AI fit in both the writer’s room and on screen. It appeared that the humans “won” that battle, according to the AP. However, shortly after the new year, SAG-AFTRA surprised its membership with a deal with Replica Studios to make “digital voice replicas” of performers. These replicas are essentially AI-powered voice packs created with voice actor’s voices.

The backlash from the voice-acting community, many of whom are SAG-AFTRA members, was immediate. Some called it “garbage,” while others lamented the “commodification of their performances.” And everyone was blindsided. Steve Bloom, perhaps one of the most well-known and recognizable names in the industry, said “nobody” knew the deal was even in the works despite the union claiming otherwise.

Despite the sense of betrayal, the voice-acting community seems to be fully aware that artificial intelligence is here to stay. However, they believe that SAG-AFTRA should be focusing on how to “keep the human first” before blindly engaging with this new technology.

They’re not alone either, as generative AI has a vast array of potential uses on the technical side as well and could “radically reshape gaming” on every level.

Video Game Stocks: Who Will Win in 2024?

Although broad societal concerns about the role of artificial intelligence in both the tech and art spaces will remain, firms large and small are trying to incorporate the new technology into their products and services. Steam, the world’s largest video game storefront, adopted new changes on Jan. 9 for how it handles AI content. Square Enix (OTCMKTS:SQNNY), the studio behind the legendary Final Fantasy series, President Takashi Kiryu said in his New Year letter that the firm “intend[s] to be aggressive in applying AI and other cutting-edge technologies to both our content development and our publishing functions.”

While the entire industry might not uniformly reflect Square Enix’s “aggressive” push into AI, the Japanese developer is clearly not alone. However, the great challenge for the industry in 2024 is balancing the financial and productivity benefits of this new cutting-edge technology with the concerns of the artists and developers in their employ. All while still providing entertaining products and services for their customers.

On the date of publication, Andrew Bush held a LONG position in NVDA, NFLX, APPL and AMZN stocks. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Andrew Bush is a financial news editor for InvestorPlace and holds two degrees in International Affairs. He has worked in education, the tech sector and as a research analyst for a DC-based national security-focused consulting firm.

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