Want to invest in gaming industry? Analysts see up to 50% upside in this stock

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With the evolution of video games, the definition of games has now transformed from competition on physical strength to become more of mental strength over time. With the robust outlook, there are hopes the gaming industry in India is likely to grow at 31% annually over the next two years as the rising number of paid users to be the key growth driver. This also makes the case to zero in on investment opportunities in the listed space.

Analysts on Dalal Street see up to 50% upside in recently-listed firm Nazara Technologies. Shares of the company have already jumped around 49% to Rs 1,635.60 on June 2 against the issue price of Rs 1,101. Ace investor Rakesh Jhunjhunwala had a 10.82% stake in the company as of March 31.

Brokerage Dolat Capital has a ‘Buy’ rating on Nazara Technologies with a price target of Rs 2,400. On the other hand, Spark Capital initiated coverage on the company with a price target of Rs 2,230.

Trends in gaming industry

Market watchers believe that online gaming has become a prominent part of the Indian entertainment industry. It is likely to grab a higher share of overall entertainment spends in the medium-term: Theatrical movie spends and television subscription witnessed increased patronage in India when Gen X (born between 1965-1980) and Gen Y (born between 1981-1996) respectively entered the working-age population.

Similarly, Gen Z (1997 – 2015) should drive online gaming spend over the next 10 years as it has become the primary entertainment option for them. “The lucrative gaming segment from a medium-term perspective is transaction-based games, where Indian publishers dominate: Transaction-based gaming, despite their legal hurdles in India, have become around 82% of the online gaming market as the gamers are familiar with the games and there is a probability of earnings returns,” Spark Capital said.

Should you invest in the stock?

Since its inception in 1999, Nazara has undergone several transformations and donned different hats to adapt itself to the changing needs of the gaming industry by altering its business model.

“The gaming industry revolution should gain further momentum with technological advancements making it difficult to predict which sub-sector within the gaming to bet on. Nazara currently boasts of an enviable business model which can alter itself to the changing needs of the gaming industry, making it the best proxy to play the underlying gaming sector growth,” Spark Capital said in a report.

Dolat Capital added that India is expected to have 130 million mid-hardcore gamers by FY25. “We expect competitive spirit to kick in amongst gamers which will drive up average revenue per user in India ($9/pa), thus the company would gain both in volumes and value-driving up multi-year growth trend. Nazara offers an opportunity to buy on a portfolio approach thus neutralizing the risk while opening up doors to play a part in megatrend of gaming in India with significant optionality and thus should command premium valuations,” the brokerage said.