Stocks for Video Game Enthusiasts
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite the popularity of mobile gaming and the perception that traditional console video games are dead, video game makers have enjoyed a great start to 2013. In addition, a positive catalyst in the form of the new generation of consoles may be in the works for the end of 2013. As a result, the great run enjoyed by companies in the video game industry may still have legs. If that’s the case, here are a few stocks that may be poised to profit handsomely.
Activision Blizzard (NASDAQ: ATVI) has a $15 billion market capitalization and holds a portfolio of popular titles, including Call of Duty and World of Warcraft. On Feb. 8, the company released quarterly results that beat expectations, as sales increased 7.6% versus the prior year. The higher sales were driven by strong holiday sales of the hit title Call of Duty: Black Ops II.
Meanwhile, net income nearly quadrupled from the year-ago period. As a result, shares soared 11% on the day. Furthermore, the company forecast first-quarter and full-year profits of $0.10 and $0.80, respectively. The stock is currently trading at slightly less than 17 times fiscal 2013 earnings of $0.80 per share.
Electronic Arts (NASDAQ: EA) is a $5 billion company with video game franchises including Battlefield and The Sims. In early February, Electronic Arts reported that revenues over the first nine months of the year declined nearly 7% year over year. In addition, the company slashed its fiscal 2013 earnings forecast because of weak demand.
Electronic Arts appears to be overvalued compared to Activision Blizzard. EA's stock is trading for a trailing price-to-earnings ratio of over 30 and a forward P/E of 15 at recent prices. Despite the company’s struggles, the stock is off to a great start to 2013, rising almost 20% to begin the year. Investor optimism may be driven by the fact that the company has several planned sequels of its popular titles to be released this spring, including new installments of the Battlefield and Crysis titles.
GameStop (NYSE: GME) is a retailer of new and used video games and video game accessories that might be better-suited to value or dividend investors. The company carries a $3 billion market capitalization. The company is a new entrant into the dividend-paying stock category, having announced its first payout one year ago. However, the company increased its dividend by a robust 67% after only two quarterly payments.
At recent prices, the stock yields 4%. GameStop trades for a forward price-to-earnings ratio of 7.5, perhaps struggling to overcome the notion that brick-and-mortar retailers are the modern-day buggy whip business.
The Bottom Line
Despite the worries surrounding the traditional video game industry, help may be on the way later this year. Rumors suggest that Sony and Microsoft will soon announce next-generation consoles for their PlayStation and Xbox platforms.
Interestingly, GameStop fell 6% on Feb. 6 on rumors that the new Xbox console would prohibit used games from operating on its console. According to video game website Edge.com, Microsoft’s next console will include technology that registers video games over the Internet and renders resold titles useless. GameStop was quick to denounce the report as purely speculation.
Nevertheless, investors would be wise to monitor this rumor. GameStop generated 27% of its fiscal 2012 revenue from used video games. Losing this crucial segment in the future could deal its business a serious blow. Meanwhile, the new generations of consoles would surely be a positive for video game makers Activision Blizzard and EA, who would have fresh platforms on which to sell new releases of their popular titles.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and GameStop. 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!