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Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past five and a half years, Call of Duty has made shock waves and set new standards in the gaming industry. So it’s only reasonable to call Vivendi’s partnership with Activision Blizzard (NASDAQ: ATVI) successful. Now that the company has bought back majority of its shares from Vivendi, the move represents a new dawn for the gaming industry and the shareholders of Activision Blizzard. Furthermore, with the release of new gaming consoles by Microsoft, Sony and Nintendo, the competition in providing the most entertaining game is fiercer than it has been for a long time.

Along with the management-led buyout, Activision Blizzard also announced that the company expects to outperform its initial earnings estimates by $0.03 a share. Activision is considered to be one of the biggest game producers in the world, along with Ubisoft (NASDAQOTH: UBSFF) and Electronic Arts (NASDAQ: EA).

Thanks to sales of Skylanders Giants and Call of Duty Black Ops II, the game manufacturer has managed to have a significant hold on the market. The two leading games were released last fall but continued to sell accessories in the form of downloadable content for Call of Duty and toys for Giants until today. The company’s World of Warcraft franchise continuous to spin in a downwards spiral as it ended the quarter with 7.7 million subscribers, down from 8.3 million in the previous quarter.

The pipeline

For 2013 and 2014, the company is working on famous titles; some are extensions of its earlier games, while the company is also introducing new games to its product line. After the management-led buyback, the company can be expected to refocus its efforts in the North American market as is suggested by its move to rejoin the Entertainment Software Association (ESA).

Call of Duty: Ghost, Skylanders: Swap Force, Angry Birds Star Wars and Teenage Mutant Ninja Turtles: Out of the Shadows – these are the high-profile titles which will be launched in late 2013 and at the beginning of 2014. Keeping this in mind, the company’s Q3 and Q4 revenue and cash flow should be receiving a regular boost. Activision's EPS has been improving for the last four consecutive years and a similar hike is expected for 2013 as well. This is especially true since revenue and gross profit increased on a year-on-year basis. The positive cash flow and decrease in liabilities are also expected to continue in Q2. 

Indicator

Activision Blizzard

Ubisoft

Electronic Arts

Market Cap

$17.0 bil

$1.5 bil

$7.5 bil

P/E TTM

13.9

17.7

79.4

Forward P/E

13.6

13.8

20.7

PEG Ratio

2.7

0.0

0.7

Operating Margin % TTM

30.5

7.0%

3.2%

Dividend Yield, %

1.25%

-

-

Current Price

$15.38

$15.70

$25.26

Valuations

Based on P/E values, Activision Blizzard and Ubisoft are undervalued, as the industry average P/E is 24.3. Looking ahead, Ubisoft is expected to make the most of its game releases for the remaining part of the year. Its forward P/E and PEG ratios are on par with Activision Blizzard. However, July has not been not pleasant for Ubisoft since its database was hacked and put users' emails and passwords at a risk. On a brighter note, the company is coming out with some big names such as The Division, while having three new editions of Assassin’s Creeds in development for the upcoming year.

On the operating margin front, Activision Blizzard is head and shoulders above the competition – the company’s efficiency is far higher than its competitors. Not only that, the company also has a 1.2% dividend yield while Ubisoft and Electronic Arts do not provide dividends to shareholders.

Electronic Arts, on the other hand, reported net loss in its latest earnings report, earlier this month. The company’s stock rose on the back of this news as it was a smaller-than-projected first-quarter loss thanks to strong cost controls and digital sales. The company delivered on top-line growth and margin expansion, while keeping costs in check in the latest quarter.

It still faces considerable risk for the remaining quarters of the year, however. The results highlight Electronic Arts' transition from the maker of games previously only sold at retail store to now being able to generate most of its sales and revenue from digital downloads for the next five years.

The verdict

The three video-game producers have a seemingly positive months ahead through 2014. Sales and revenue increases are expected as the newly launched consoles help heighten interest in new titles.

That being said, Electronic Arts has risk attached to its stock due to its lack of performance, while Ubisoft and Activision Blizzard have got a lot more potential to reward shareholders – especially as the launch of famous game titles quickly approaches. Buy Ubisoft and Activision to make the most of a strong end to the year.

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Awais Malik has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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