Making Money from Video Games

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

Sticking with my buy what you know theme ... my next look is towards the video game industry.  I grew up building high end PCs and playing video games and caught the wave early on stocks like AMD and NVDA, times however are changing. Consoles have established their dominance and now we have the "mini games"  such as Words with Friends and Farmville that are generating millions.  But what's the play here.  There's no reason to go anywhere near the traditional PC space if you're looking for gold through gaming.  

The console developers themselves are also a bust.  Microsoft, Sony and Nintendo are either too bloated (in the case of MSFT and SNE) or poorly run and not profitable (in the case of SNE and Nintendo).  

My view is on the game developers themselves.  Free from the burden of creating physical hardware, they can simply focus on building franchises of games that, despite a rough economy, have been selling.  In this space, the two names I like are Activision Blizzard (NASDAQ: ATVI) and Zynga (NASDAQ: ZNGA).  

First off, Activision Blizzard.  This is an unusual pick for me since I grew up in love with the Medal of Honor franchise and all of the Sim games (which Electronic Arts acquired when they bought Maxis).  But the tides have certainly turned and the Goliath of Call of Duty cannot be ignored.  It is a billion dollar franchise that still seems to have the legs to keep going.  Not only do they have a rabid fan base that buys the game immediately, they also have managed to add an online community (that costs money) and in game add-on packs (which also cost money).  All of which is fairly well received.  To dive a bit deeper the company has numerous other big titles, pays a nice dividend, is buying back shares, cash flow is perfect, and it's growing at a good rate.  

Next is ZNGA.  I hate this company, well, I hate seeing this company's products on Facebook.  But every week my mom, aunt and grandma all take about their farm or castle or kingdom or city ... and all of these games belong to Zynga.  The beauty here is that they are not complicated games that take years to develop and produce.  They are simple little time wasters.  They only cost around $2 (to buy without ads) or free (and Zynga makes money from the ad revenue).  They also have in-game items you can buy with real money for those that are truly addicted.  I think this is a great company and will continue to grow its revenue at a massive rate.  The only risk I see to this company is if Facebook decides to make a change that jeopardizes users' ability to easily play these games, as Facebook is still the primary platform.

I see both of these stocks being winners over the next few years with ZNGA being the risker (and potentially more rewarding of the two).  

Motley Fool newsletter services recommend Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Fool blogger Chris Martin maintains a long position in ATVI. 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.

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