Stock Analysis & Ideas

Amazon: The Next Big Video-Game Disruptor?

Shares of e-commerce and cloud giant Amazon (AMZN) have been steadily climbing back in recent weeks on the back of the broader market rally. Recent results have been solid, but broader market forces have been moving the stock in quite a wide trading range. As the firm continues moving past various inflationary and COVID-19-induced headwinds, the odds of the stock waking up seem to be high.

Though the last quarter revealed some resilience in e-commerce and public cloud, two high-growth markets that Amazon dominates, it’s the video-gaming industry that the firm could make the most significant disruptive impact over the next five years.

For now, video gaming seems like more of a value-enhancer (like video streaming) for its Prime service than something that could evolve into Amazon’s next big growth driver.

While a monthly Twitch subscription, in-game loot perks, and free games via Prime Gaming make Prime stickier for the gamers, investors should look to where the company is headed next with its gaming business. Given the size of the video-gaming market, I would not be surprised if Amazon looks to become a leader in the industry at some point over the next decade.

While Amazon is an underdog in gaming, there has arguably never been a better time to get into the video-gaming business, with the price of admission to triple-A gaming titles slated to come down with the advent of cloud-gaming technologies like Amazon’s Luna. I am bullish on the stock.

Who Can Compete Against Microsoft in Gaming?

Microsoft (MSFT) has a nice lead in the gaming space today, with an Xbox Game Pass subscription service that looks impossible to stack up against. With monthly titles and the option to stream games via any device through xCloud (Xbox Cloud Gaming), the competition is falling behind and fast.

Sony and its revamped Playstation Plus service are comparable to Xbox Cloud Gaming, but they could fall well short in the caliber of new “Day One” content. Microsoft has invested in its Xbox gaming moat for many years. With Activision Blizzard (ATVI) content to be added to the arsenal, it seems like video gaming is a game that Microsoft simply cannot lose.

If there’s a company with deep pockets to make a dent in a booming industry, it’s Amazon. And the company looks to be taking a vastly different approach than Microsoft. Rather than funneling considerable sums into acquiring video-game firms, the firm seems to be narrowing its sights on games with blockbuster-like potential.

It doesn’t take a multitude of titles to find a spot with gaming audiences. Instead of throwing many titles at the wall to see what sticks, Amazon looks to be focusing on massive projects with staying power.

We’ve all witnessed the profound success of games like World of Warcraft and Grand Theft Auto, which have continued to be popular for many years after their release. Such titles are sticky, and they don’t get stale quickly like some of the titles released by publishers looking to produce quantity over quality.

New World: An Initial Hit That Lost Its Way

Lost Ark and New World have been intriguing titles brought forth by Amazon. The latter title was very ambitious, and while the initial surge in popularity was promising, the title has since lost nearly 90% of its player base since its launch. Undoubtedly, Amazon did many things right with its next-generation MMORPG, but it hasn’t been able to keep players engaged, as demonstrated by the free-falling population.

New World may have been an ambitious, expensive title, but its glitchy launch and technical issues have likely caused many gamers to move on to other games. I think the boom and bust of the title should serve as a learning opportunity as the company pursues its next big project.

Undoubtedly, New World was Amazon’s most ambitious title to date, and it could have stacked up against the likes of World of Warcraft had the game been more polished during its initial launch.

Although the game has since improved many of its issues, Amazon may have no choice but to make the title free-to-play to reignite interest. I suspect the rocky launch will only make Amazon better once it’s ready to pull the curtain on its next blockbuster title.

The company knows how to spark initial interest. Retaining interest and continuous engagement of gamers, though, is another battle. Unfortunately, it looks like an uphill battle to win back the many gamers that fled New World in the months following its launch.

All it Takes is One Blockbuster

In any case, I do think that all it will take is one or two profound successes to propel Amazon to the forefront of the gaming scene. With various third-party titles and exclusive must-play titles included in Amazon’s Luna game-streaming service, it’s clear that Amazon has the means to disrupt Microsoft’s Xbox Game Pass. Exclusive blockbusters, in particular, could be the key ingredient to taking Luna off the ground.

All it takes is one game, like World of Warcraft, that stays refreshing with constant updates to win the heart of gamers. Amazon certainly has the capabilities to host millions of users. It just needs to find the right formula, and it could have a World of Warcraft-like title for the modern era.

Whether Amazon can bolster New World to be that title is the million-dollar question. Regardless, I would not count Amazon out, as it looks to disrupt the gaming industry.

Wall Street’s Take

Turning to Wall Street, AMZN stock comes in as a Strong Buy. Out of 35 analyst ratings, there are 34 Buys and one Sell recommendation.

The average Amazon price target is $4143.76, implying an upside of 24.1%. Analyst price targets range from a low of $2,800 per share to a high of $5,000 per share.

The Bottom Line on Amazon Stock and its Gaming Push

Microsoft has a wide moat around gaming, but it’s not impenetrable. With deep pockets, Amazon can carve out a big slice of the gaming industry with its unique angle. If there’s a company that can disrupt an established FAANG player, it’s another FAANG player.

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