Gaming Is a Billion-Dollar Opportunity for Amazon Stock

AMZN continues to break into new businesses to boost the bottom line

Are there any other challenges for Amazon (NASDAQ:AMZN) to conquer? The answer is apparently “yes.” Jeff Bezos’ company is now getting into the gaming business, which could easily be a billion-dollar win for Amazon stock.

Last week, Amazon released its first entry in the gaming space, Crucible, a first-person shooter from Amazon Game Studios. The game is playable on PCs and is free to download and play.

Amazon is banking on making its money through digital merchandise and seasonal battle passes, in which players would pay a regular fee for access to special items and features. It’s a business plan that’s worked brilliantly for Epic Games, the creator of the extremely popular series of Fortnite games.

Fortnite boasts 350 million players around the globe. Sales of its battle pass generated $1.8 billion in 2019, and $2.5 billion in 2018.

This tells me two things — that there is a ton of money to be made even by releasing a so-called “free” game, and that the market itself is softening a bit for Fortnite.

If gamers are looking for something different, but has enough similarities to Fortnite and other first-person shooters to be comfortable, then Crucible may very well fit the bill.

Amazon’s Big Bet on Gaming

Amazon announced way back in 2016 that it was developing Crucible, and it took four long years for the game to reach the market. It’s available for streaming on Twitch, the platform that Amazon bought back in 2014.

Players have 10 characters from which to choose, each with their own strengths. And you will probably find some of them familiar. There’s a killer robot that is strikingly similar to the hero of Disney’s (NYSE:DIS) Wall-E film; there’s a demon with a huge axe that will remind you of a character from Doom and a blue-toned female character that invokes memories of Avatar.

Crucible has flashy graphics and three game modes, including a battle royale mode similar to Fortnite.

And just around the corner is Amazon’s next game title, New World. The second release is a multiplayer online role-playing game that is due for an August release. And unlike Crucible, New World has a price tag of $40.

“Games is a hard business, so it makes sense that it takes a while to develop a hit and [it] makes sense that they will tweak their model and headcount as they evolve,” Wedbush analyst Michael Pachter told CNBC. “If they can’t compete with Crucible, they’ll try with New World. If that doesn’t work, they’ll try again.”

Does Amazon need to get into the gaming business to turn a profit? Not in the slightest. However, I like that Bezos & Company is branching out into another business.

I recently wrote about why I think Amazon stock is a must-own for growth investors. And AMZN’s foray into gaming reiterates the point that I made there. We should celebrate companies that reinvest in themselves to achieve long-term goals and grow their profits.

That’s exactly what Amazon is doing with its gaming division.

The Big Picture for Amazon Stock

In April, Amazon reported first-quarter earnings that were somewhat of a surprise on Wall Street. AMZN’s revenue of $75.5 billion was perfectly fine, beating analysts’ estimates of $73.6 billion.

But earnings per share fell way short of expectations. The number was $5.01 per share, when Wall Street was expecting $6.25 per share.

That sent Amazon stock tumbling 4%.

“From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it’s also the hardest time we’ve ever faced,” Bezos said.

Amazon is expecting $4 billion in operating profit in the second quarter but says that will all largely go back into the company on costs related to the novel coronavirus. So, it’s possible that Amazon’s second-quarter numbers will be a disappointment as well.

Does that mean it’s time to drop Amazon stock? Not by a long shot.

Remember, even without gaming, Amazon is uniquely positioned to capitalize on what appears to be a new reality.

More people are working from home or staying in, which means increased traffic for Amazon’s popular Amazon Web Services. AWS powers nearly 200 products and services offered by some of the biggest companies in the market.

And second, brick-and-mortar retail stores were already getting hammered before the Covid-19 outbreak, and now some of them are falling into bankruptcy or outright closing. Amazon’s e-commerce powerhouse has already capitalized on that trend, prompting the company to hire another 175,000 workers just to keep up with the demand.

So far this year, Amazon is up a blazing 31%.

The Bottom Line on Amazon Stock

You can take this to the bank. AMZN is going to continue innovate and find new ways to break into businesses to grow its bottom line. And in the meantime, management is doing the right thing to invest current profits into making the company stronger for the post-coronavirus world.

Amazon stock is a strong buy in my Portfolio Grader right now, where it gets a well-deserved A grade.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.