As companies and consumers continue to worry about the possibility of a recession, one industry may be immune from an economic downturn. Video games have historically been a popular sector for investors during a recession due to people spending more time at home when the economy is suffering and video games being a relatively cheaper form of entertainment that consumers could to turn to, especially at times of high inflation and high gas prices. Michael Pachter, Managing Director of Equity Research at Wedbush Securities, joins Cheddar News' Closing Bell to discuss.

Closing Bell

Could Video Game Industry Be Recession-Proof?

now switching gears as companies and consumers worry about a possible recession. One industry may be immune from an economic downturn. Video games, that's right. Video games have historically been a popular sector for investors during a recession due to people spending more time at home when the economy is suffering and video games are relatively cheap form of entertainment that consumers can turn to during high inflation and high gas prices. So joining now to discuss is Michael Pachter, managing director of equity research at Wedbush Securities. And I want to ask if a recession does happen, how should investors consider video game stocks? I mean you said it right there normally quite recession proof and I will say what's a little different this time is that this is not a job sessions. So we're probably not going to have people that are suddenly out of work and find themselves stuck at home and trying to entertain themselves. Um, but in contrast, people are fully employed gamers, you know, depending on the game tend to be younger. Um, so kids out of school absolutely going to play on roadblocks. Um, you know, younger people fully employed, you know, anybody who wants a minimum wage job can get one. So they have more money to spend. And when you really work through, you know, the math on what the average gamer spends, it's less than $1000 a year. So it sounds like a lot of money, but it's three bucks a day and you know, people are going to find three bucks a day to play their favorite mobile game, they're going to find 60 bucks at holiday to play candy crush. I'm sorry to play Call of duty. And so you know, I think you're going to see the video game makers do really, really well. The publisher is really, really well. Roadblocks has been suffering mightily of late and kids are getting out of school now, you're going to see roadblocks usage spike and little kids, nine year olds don't even know what the word recession means. So it's pretty immune and again, we tend to really entertain ourselves. We've been locked down for a couple of years. Yes, we are playing games. Those are habits that are going to die hard. Um we're going to go outside. So that's why the release schedule for the big games tends to be skewed toward christmas. So really everything should be back into recovery mode by holiday and the publishers are exposed to mobile like take to um should thrive throughout the summer now, like you mentioned during the pandemic when we were locked down, video games are really thriving, but during the recession, folks might reconsider what they want to spend money on. So if a recession happens, do you think these companies will see success similar to the levels they saw during the pandemic or No, no, I think, I think you'll see a pullback. I mean we, we nominally we were working and going to school during the pandemic shelter in place, but you know, kids were sitting at home the whole time. So they were probably playing on their phones, you know, or even on their desktops, in between classes or or even probably during class. That doesn't happen when you go back to school. It certainly doesn't have when you go back to work. We've already seen that decline. That really happened kind of latter half of 20, first half of 22 I think now we're back in the normal territory so we're going to be back to kind of 2019 levels but we expanded the market. So we have a lot more people playing games and the companies have evolved their business model. So you know, back in 19 Call of Duty was a console game only now it's a mobile game, a free console and pc game and a $60 premium game apex Legends is on mobile now. So you know, that's an ea game. So we've we've come up with different ways to play and what they're doing is grabbing that consumer wherever they find him, whether they're at school or at work, they're still playing the game. So we were in the growth path right now but we had to decline in the second half of 21 1st half of 22 the stocks got killed. Alright, so the gaming industry is seeing a lot of consolidations as you probably know, Microsoft is in the process of perhaps buying Activision and Grand theft Auto Maker take two. Interactive, recently acquired mobile game developer Zynga, could this mean more consolidations could be coming for big name companies like these? I doubt it. I mean we have to see what happens with Microsoft and Activision. I think that the smart money thinks that the FTC is going to block this because they hate Big Tech. And the truth is the FTC has no ability to block a merger that can sue and then it's left to the courts and the courts are not going to block this merger. Microsoft and Activision don't have any pricing power. They're not going to raise prices. The concessions that the FTC will seek, you know, don't raise the price of the Xbox and continue to make Activision's games for the Playstation Microsoft going to say yes. So that deal is going to go through once that happens, then we'll see if others get interested. Um I don't think the media companies are players at all. I don't think Disney or you know, a paramount or CBS is going to buy anybody. Um I do think the tech companies are players, so netflix may be um Apple, maybe google maybe, but there's really not much left out there. I mean there's take two obviously and electronic Arts and Ubisoft and maybe Nintendo. Those are big mergers hard to pull off. Microsoft has a robust game business. The other guys do not. So I'd say no, I think maybe netflix will buy somebody smaller, but I don't think anybody's buying off, picking off any of the major guys. Alright, Michael Pachter, make sure you drop your game or tax. We can play some apex together, perhaps over the long weekend. Love that. Crazy, crazy, crazy. I love that managing director of equity research at Wedbush Securities make sure to add him on twitch, following on twitch to for his streams. Love having you on mike. Thank you.