The increasing adoption of AI across the video game industry is enhancing its growth outlook, particularly through improved profitability, enhanced efficiency and reduced production costs. According to analysts at Morgan Stanley, advanced AI tools could slash game development costs by nearly 50%, potentially unlocking about $22 billion in annual profits worldwide, as quoted on a Reuters article.
This is a tailwind for the industry, which appears to be regaining momentum. The TriplePoint Video Game Index, a global benchmark tracking publicly listed video game companies, remains down about 18.97% year to date, but shows a 7.77% gain over the past month. The index has posted gains of 8.91% over the past year.
Improving risk-on sentiment, as investors increasingly look past Middle East-driven volatility, could further support the sector’s momentum, further strengthening its growth prospects. According to Fortune Business Insights, the growth outlook of the industry remains optimistic, with market revenues anticipated to witness a CAGR of 6.30% from 2026 to 2034, reaching a valuation of $415.78 billion in 2034.
Diving Deeper Into AI-Driven Profit Gains
According to Morgan Stanley, as quoted on the abovementioned Reuters article, the integration of AI tools to automate key development processes, including environment creation, dialogue generation and testing, is expected to compress timelines, reduce costs and drive margin expansion. The Wall Street brokerage notes that game development, traditionally costly and labor-intensive, could become more efficient as AI supports smaller teams and quicker post-launch updates.
In addition to cost efficiencies, AI could lift revenues by extending player engagement and driving higher spending on add-ons, in-game purchases and subscriptions. The brokerage notes that publishers could pivot toward enhancing existing franchises using AI-driven content rather than relying solely on new launches, helping stabilize earnings.
Morgan Stanley expects global video game spending to reach $275 billion this year, with nearly $55 billion flowing back into development and operations, underscoring the scale of reinvestment in the industry.
According to Morgan Stanley, platforms and operators, including Tencent, Sony and Roblox, are likely to be primary beneficiaries, alongside scaled publishers such as Take-Two TTWO, Electronic Arts EA and Ubisoft. Meanwhile, weaker franchises could come under pressure as AI reduces barriers to entry and increases competition.
Improving Hardware Sales Signal Strength
According to data from Circana, as quoted on Insider Gaming, video game hardware sales in the United States posted a strong rebound in March of this year, jumping 69% year over year. Sales totaled $500 million between March 1 and April 4, compared with $297 million a year earlier.
So far in 2026, video game hardware sales have risen 38% year over year, totaling $1.07 billion through the first three months versus $777 million a year earlier. The increase reflects stronger demand, after consumers had held back purchases ahead of the anticipated launch of the Nintendo Switch 2.
As quoted on the abovementioned article, the performance was led by the Nintendo Switch 2, which ranked first in both unit and dollar sales, while the PS5 ranked second and rose 3% year over year.
GTA VI Could Add Fuel to Gaming Sector Growth
The highly anticipated GTA VI, which is expected to be released in November this year, could make 2026 a massive year for the video game industry. According to Circana, as cited in an early February GameSpot article and as quoted on Yahoo Finance, the launch of GTA VI is expected to support a record-breaking year, with total industry revenue forecast at $62.8 billion, implying a 3% increase from 2025’s $60.7 billion.
Circana also states that the game has the highest “purchase intent” ever recorded and expects it to boost accessory and subscription sales.
Video Gaming ETFs to Play the Upside
Investors can take a look at the following video-gaming ETFs to increase their exposure to the market. Investors can consider VanEck Video Gaming and eSports ETF ESPO, Global X Video Games & Esports ETF HERO, Amplify Video Game Leaders ETF GAMR and Roundhill Video Games ETF NERD.
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Take-Two Interactive Software, Inc. (TTWO): Free Stock Analysis Report
Electronic Arts Inc. (EA): Free Stock Analysis Report
Global X Video Games & Esports ETF (HERO): ETF Research Reports
Amplify Video Game Leaders ETF (GAMR): ETF Research Reports
VanEck Video Gaming and eSports ETF (ESPO): ETF Research Reports
Roundhill Video Games ETF (NERD): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).