Are Video Games the Next Consumer Staple?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As you may know, people of all ages, but in particular 20- and sometimes 30-somethings, sometimes spend an inordinate amount of time playing video games. While I personally stopped playing this form of entertainment over 20 years ago, many still find these activities both pleasurable and arguably addicting. Obviously there's a market for this form on entertainment, and as you might suspect corporations have been meeting the needs of these consumers for years. That means it's a proven market, and it's a market that, in my estimation, is more relevant than ever.
So, let's take a look at a few video game companies. First among them is Activision Blizzard (NASDAQ: ATVI). Currently, analysts consider the stock a strong buy. However, I might disagree. If the recession were to persist long enough, do you think this form of discretionary entertainment would hold up? Perhaps not. Then again, thus far it has staying power, so let's look "under the hood." One product Activision offers is "Call of Duty," and realistic action games such as this have been a big hit. Currently, Activision Blizzard is attractively priced, with a trailing P/E of 14.21 and possessing very little debt and a 23.66% margin. To me, these metrics alone should raise some eyebrows and are certainly nothing to sneeze at.
Next, we'll look at Electronic Arts (NASDAQ: EA), which has a P/E of roughly 33, so it's not quite as attractively valued as Activision Blizzard. EA has greater debt on its books than Activision, with a 0.55 debt to assets ratio. Its margins weigh in at only 4.42%, and although Electronic Arts is renowned for its realistic sports games, overall Activision Blizzard appears to be the better of the two.
Last, we'll examine Take Two Interactive Software (NASDAQ: TTWO). Take Two is most known for its Rockstar Games and is not currently profitable, with a -1.40 EPS. However, it's forward-looking P/E is slated to be 6.48. Yet, as you might suspect, Take Two might miss on earnings, so forward P/E's are always somewhat speculative, particularly in regards to consumer discretionary stocks (i.e. entertainment). Take Two's debt-to-asset ratio is pegged at 0.48, so it's financially healthier than EA, but significantly more debt-ridden than Activision's 0.20 metric. Take Two's margins at -11.18% mean that Take Two lacks profitability and clearly is not the "best of the breed" in this respect. As a final note, Activision Blizzard is the sole dividend payer of the three, paying out on a yearly basis, but unfortunately lacking a DRIP or DSPP. Clearly, given all the above-mentioned considerations, Activision seems poised for long-term success and is my pick among electronic entertainment/video game stocks.
Here's my take: video games are recession resistant. Despite hard economic times our young people (and people of all ages) continue to play video games. Like movies, gaming offers a sense of escape from the stresses of everyday life. This is a shared and common characteristic of nearly all forms of entertainment. Also, the evolving nature of the gaming industry will only serve to spread the sense of euphoria and excitement surrounding this dynamic media. It's through these joint characteristics that video games make a compelling case for their market value and demand. Therefore, going forward expect video games stocks to thrive in even the most challenging economic environments.
The new entertainment landscape can be treacherous! Please be mindful of emerging market trends and cast a wide net when evaluating all potential and current investment opportunities. While no holding is the magic bullet leading to a sound portfolio, each one has its advantages and disadvantages and investors must adopt an ethos of continual education and continuous improvement to improve their odds. Through careful examination of individual stocks, investors will go a long way towards increasingly both their financial IQ and probability of long-term success in the market.
dmercer1 has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . 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!