Showdown at E3: Part II -- It's Game Time!

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(For Part I about the console war, click here.)

Our second installment in the coverage of the 2013 E3 convention looks at the second most important part of the convention: the games. After all, Part I was about the flashy new consoles, but what is a console without games to play it on? Well, yes, the PS4 and the Xbox One are more about home entertainment than just games, but having a console launch with no games is like going to a McDonald’s with no Big Macs…worthless. Fortunately for us, Day 2 of E3 was the time for game developers to shine after the fireworks of the console-heavy Day 1, and if the previews and stunning graphics are any indicator, customers and investors are sure to be satisfied.

EA: It’s Really in the Game

Always making sense regardless of what the rest of the convention has to offer is Electronic Arts, the company behind iconic franchises like Madden and Battlefield. Typically the go-to company for games that encourage social behavior, they put out a flashy press conference that wowed the crowd with next-gen ready games and franchise reboots.

In the sports department, the highest-grossing segment of EA’s work, the new Madden NFL 25 and a reboot of the NBA Live franchise gave people a lot to cheer about. Set to be released for the current consoles as well as the new-ones, EA emphasized more realistic gameplay and graphics that give the user more connectivity and precision in the games. The reboot of NBA Live will give users more dribble control for players and more realistic motions and crowd noises, so it feels more like a real basketball game. For Madden, EA claims they have quadrupled the texturing in the game’s graphics, as well as created more dynamic offensive and defensive lines with greater AI responsiveness and better control of the field of play. Both games will be available on the PC and current consoles, but only the PS4 and Xbox One will carry the new Ignite software engine that increases the physical reality the games offer; they will both be considered “launch titles” for the two new consoles.

Getting away from sports, EA got very busy this year with its other hits. The new sequel to the successful Battlefield series was released, and graphically it takes advantage of the powerful new consoles but also has a feature that allows the user to command the troops using a tablet, so the game can be played away from home as well. This is a good move by Battlefield because it recognizes the increasing usage of tablets by gamers and the appeal of being able to play console games on the go, which keeps not only console gaming in the forefront of gamers’ minds but also shares the stage with the newest technological designs.

Activision Blizzard: A Shooter You Can Wag Your Tail At

Another mainstay of E3 is the presence of Call of Duty, made by Activision Blizzard, and this year was no exception with Ghosts, the latest offering from the CoD empire. As popular as the franchise is, it has taken some criticism for repetitive gameplay that has mainly involved running around and firing machine guns. While that is a turn-on for a lot of gamers, it does lose its appeal after a while, even when the games offer better graphics and increased multiplayer options. For Ghosts, Activision made some significant changes that keep the franchise fresh. In terms of combat, there is more emphasis on guerilla tactics and stealth, a noticeable departure from the guns-a-blazing approach to previous incarnations. Abilities to hide behind walls and leapfrog them have been streamlined for less button-mashing, and the landscapes are the most realistic of any first person shooter. This provides amazing cover for stealth fighting, as well as an environment that reacts with the gameplay as close to real life as possible, including dings on machine guns and the effects of wind on one’s clothing. While these are small details, it helps the user get more into the game, which is the feeling that should naturally come with a first person shooter, and will give Ghosts a big leg up in the tough shooter market.

The biggest buzz of Ghosts has been the ability to play as a dog. Yes, a dog. In the game, you can play as Riley, an army dog that can attack soldiers, move through terrain, and lure enemies out by barking, into a sniper’s scope. Riley has already become a Twitter star overnight, according to CEO Eric Hirshberg, and while the gameplay mechanics of playing as a canine may make one chuckle and scoff, the instant attachment fans have to Riley is good press for the game, and for Activision.

Disney: Whimsy and Legacy

The other big player is Disney, which has stayed primarily out of the fiercest video game battles but emerged with the long anticipated Kingdom Hearts 3, Disney’s formerly PS-only series that made Mickey Mouse a video game hero by combining good combat with a great Disney-like plot. This time though, Disney is taking this game to the Xbox One as well, ending Sony’s exclusivity, which doesn’t make too much sense outside of sales because Xbox users wouldn’t know how the previous two games went, making it more of a potential success on the PS4. Like Disney’s movies, the game is very cartoony in graphic detail, so it won’t have the polish that games like Battlefield will have, but it will still be a playable game with enough changes to lure fans in beyond the KH fanbase.

Another big announcement is Disney Infinity, a game that would allow players to build their own maps and create their own games and adventures with the multitude of Disney characters past and present. Players buy “sets” of maps and characters and create their own games based on those maps and the abilities of characters. Initially, the game has to follow the timelines of those characters in their movies or shows, but in “Toy Box” mode, they can deviate and even mix different backgrounds from movies, like merging the sea from Finding Nemo with Andy’s Room from Toy Story. It’s a bit whimsical for a hardcore gamer, but it provides a good look back at nearly a century of Disney’s greatest characters, which comes at a time when Disney is coming off acquiring Lucasfilm and commissioning 3 new Star Wars movies, meaning that the toy box will never run dry for this company.

The Foolish Gamer’s Bottom Line

Given how popular Ghosts will be out of the box, and on the back of a huge merger with Bungie, original makers of the Halo series, Activision is a great investment opportunity, though there is a closing window for the company. Its forward P/E is at 13.90, so it is still affordable, though it could become less so with time. Still, it has a healthy 30.93% operating margin, necessary for the big holiday shopping season ahead. With room for growth, and a recent expansion, Activision’s future looks bright for any investor.

Electronic Arts isn’t too bad either given a forward P/E of 15.28, down sharply from a 69.48. However, it’s a bit risky with only a 3.24% operating margin and 4.15% return on equity, though once the games hit the shelves this summer and fall, these numbers should pick up for the company.

Disney is the least affordable of the three at a P/E of 15.99 , though it isn’t all bad. Its 15.43% return on equity is the best of the bunch, and has a 1.20% dividend yield for investors. So if you aren’t pinched in the pocket, Disney has some room for you, though if you want to add a pure gaming company, Activision or EA look like better growth opportunities here.

Ok, so we have the consoles, and now we have some games. We have our console companies and our games companies. The most important E3 in a decade hasn’t disappointed yet, but there is still more on the way. 

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John McKenna has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Microsoft, and Walt Disney. 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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