Why the Cloud Gaming Industry Is Really Growing 545%

The cloud gaming industry was worth $387 million last year, but analysts expect it to grow to $2.5 billion by 2023.

That's 545% growth. But it's not even the biggest news to come out of this market - we just witnessed a major catalyst involving two of cloud gaming's top contenders.

And the outlook might sound shocking, until you realize just how mainstream gaming has become.

What used to be seen as the domain of kids and hobbyists is now a pastime for many adults - it's even a growing professional sport.

According to the Entertainment Software Association (ESA), 65% of American adults play video games, and the average gamer is actually 33 years old. That 33-year-old is a millennial at peak buying power, so you know there's serious money behind this sector.

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Cloud gaming means people are ditching consoles to stream games on remote servers. Cloud-based games are expected to be just as immersive and high-quality as console games, but without the need for specialty hardware.

There are no boxes or disks involved with cloud platforms. It will give billions of gamers around the world access to games on their phones, tablets, and PCs.

And because cloud gaming services don't require as much hardware as consoles, it costs less to penetrate the market. The gaming industry is open to new unheard-of competitors and other companies with pockets deep enough to experiment in the field.

The trends are clearly in favor of a new cloud gaming market, with 83% of game sales since 2016 already going toward digital formats (download or cloud), versus just 17% for physical formats (console, disc).

Once a war between no more than a few consoles, the gaming industry is being leveled by the cloud. The barriers to entry are dropping, and the competition in streaming games is heating up.

Electronic Arts Inc. (NASDAQ: EA), for instance, used to be primarily known as a game developer for almost every mainstream console around. Today, it aspires to meet Google (NASDAQ: GOOGL) and Sony (NASDAQ: SNE) with its own cloud service.

A veteran in the gaming industry, Electronic Arts announced its service "Project Atlas" in late 2018, and Google announced its own "Stadia" at its March 2019 GDC keynote. LiquidSky, a new, independent cloud service, sprouted in 2017 and has established cloud gaming servers in the United States, London, and Hong Kong.

But all of this added competition might have a hard time beating one cloud gaming stock.

Unlike Apple Inc. (NADAQ: AAPL), Amazon.com Inc. (NASDAQ: AMZN), and Google, this company is the only one with its own cloud computing arm, console lineup, and established gaming ecosystem.

You might actually think you know this company well. But what it just did could prove you wrong... and it might be the biggest thing to happen in gaming since Pong.

The Biggest Catalyst for This Top Cloud Gaming Stock

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You might have guessed we were talking about Microsoft Corp. (NASDAQ: MSFT). But when a company of this size has "big news," it has to be really big.

The company announced a partnership with Sony on May 16 to join forces in the future cloud gaming market.

Sony will use Microsoft's Azure cloud servers to host cloud gaming sessions, and Microsoft will use Sony image sensors. They'll collaborate to produce AI image sensor solutions.

This is significant because the companies have long been considered bitter rivals, each with their own corner on the gaming industry.

But Microsoft gets the sweet end of the deal.

Azure is what made this happen. It's the service behind all of Microsoft's commercial cloud and intelligent cloud products. And it's so potent that it inspired Sony, Microsoft's bitterest rival in gaming, to adopt its powers in lieu of the growing competition from Google and Amazon.

The Verge reports it as a battle of old vs. new, saying, "It's all about Xbox and PlayStation beating Amazon and Google."

Microsoft does have its own specific cloud gaming service, Project xCloud, powered by Azure, but it's providing Azure services to Sony - and reportedly, Nintendo - along with a few other companies that haven't been named yet.

With Nintendo and Sony in the mix, that's the original "Big 3" consoles - Switch, PlayStation, and Xbox - joining forces under Microsoft's cloud service. That's a major sign Microsoft will be fueling this industry's 545% projected growth.

But it's not just in the gaming department. Azure is driving huge revenue for Microsoft - now over $30 billion per year.

Azure has 54 global data center regions worldwide to support it, some on almost every continent, and growing revenue from the business sector is proving it's the go-to cloud product.

CEO Satya Nadella set ambitious goals for this service over the last few years - and they've all been met.

Below are the revenue run rates - what Microsoft uses to get a snapshot of future revenue growth at a given time - for Microsoft's commercial cloud products over last four years. Some of these have already been exceeded by now.

The speedy growth of the Azure product has granted MSFT some stellar earnings surprises in 2019 already. Microsoft's total revenue went up 14% year over year, at $30.6 billion, and profits were 19% more than the year before, at $8.8 billion.

Now, with the advent of cloud gaming, the company leaves no doubt for investors in search of something to buy and hold.

The high target for MSFT stock in 2019 is $160. That means investors can make a 30% profit in roughly six months, from today's $123.74. That's significant growth for a company you may have thought was already in its prime.

It also performs spectacularly in our proprietary Money Morning Stock VQScore™ system with a score of 3.75, meaning it's a stellar growth stock.

The system doesn't lie: Earnings are supposed to shoot up 18.3% this year. Revenue is expected to be up 13%, a roughly $20 billion increase, in 2020. And the company is highly profitable right now.

Of course, in addition to gaming and business intelligence, Microsoft provides a diverse range of products for various sectors, making it a staple for any portfolio.

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About the Author

Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.

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