Digital Gaming Investment Opportunities

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

The global video games industry was valued at just over $71 billion in 2012. Global sales growth remained more or less static at 1% in value terms last year, but it is expected to grow $30 billion in the coming years (2012-2017). Some $15 billion of this forecast revenue is expected to come from digital gaming. This will be the most exciting area for investment going forward.

The video games industry now faces fresh challenges from the popularity of digital games, which can be played on other devices such as smartphones and tablets. In order for console manufacturers to succeed in this new competitive environment, they must capitalize on the growth of digital gaming.

World video games hardware, software and digital games, value size versus growth rate 1998-2012

<img alt="" src="http://euromonitor.typepad.com/.a/6a01310f54565d970c01901e1b28d5970b-500wi" />

Source: Euromonitor International

Digital games are played by more than half the American population and more than a billion people globally. Digital games on online social networking websites such as Facebook and mobile devices have grown especially popular. Among digital games, online games, facilitated by gaming platforms, have become increasingly popular. Players seem to favor the opportunity to challenge and compete with one another as an individual or as group. 
 
Asia is an especially interesting region, where players spend many hours per day gaming. I am going to present three companies that I believe are great investments going forward. 
 
The first is Zynga (NASDAQ: ZNGA).
 
Zynga develops, markets, and operates online social games as live services on the Internet, social networking sites, and mobile platforms in the United States and internationally. The company provides online social games such as FarmVille, CastleVille, CityVille, Zynga Poker, Words With Friends, Draw Something 2 and some other names. The games are available on Facebook and other social networks, and mobile platforms, as well as through Zynga.com.

Zynga is having a hard time right now, and it is hard to believe that everything will be great going forward. Despite all the negative articles you read, I think the stock is worth a gamble.
 
The refocus on its struggling social games business could be a game changer in the end. Pursuing real-money gambling in the United States would likely have taken a lot of time and resources and may never have come to fruition. So far, only Nevada, Delaware and New Jersey have legalized gambling on games of chance.

Zynga's new CEO, former Microsoft Xbox head Don Mattrick has the daunting task of making Zynga a money making machine that gamers feel comfortable with.

The second company, Giant Interactive Group (NYSE: GA), offers investors a healthy dividend yield of almost 5%. Giant is a leading online game developer and operator in China in terms of market share, and focuses on massively multiplayer online role playing games, or MMORPGs. Currently, Giant operates multiple games, including the ZT Online 1 SeriesZT Online 2, Giant OnlineXT OnlineThe Golden LandElsword, Allods Online and World of Xianxia

The company also licenses its games to online game operators in various countries, and to other Chinese companies for operation on their platforms. It markets and sells its prepaid game cards and game points through distributors and retail outlets, including Internet cafes, software stores, supermarkets, bookstores, newspaper stands, and convenience stores in China, as well as through its official game website.

In June, Chairman Yuzhu Shi offered 11 million American depository shares at $7.25, which would have been a perfect entry level for smart investors. Right now shares are trading near $8.45. 
 
Also, Giant Interactive Group will release its financial results for the second quarter on Tuesday, August 6, after market close. The company has rarely let investors down, so stay tuned. 
 
The last company worthy of a look is Shanda Games (NASDAQ: GAME. )The company is a leading online game developer, operator and publisher in China. Just recently, the company announced that it has entered into a definitive agreements to acquire affiliates providing user and payment platform services from its parent company Shanda Interactive Entertainment Limited ("Shanda Interactive").

The company expects to achieve the following through this transaction:

(NASDAQ: GAME)
  • Facilitate the establishment of the company's mobile platform
  • Improve the company's cost structure and earnings per share
  • Improve the company's use of cash
  • Eliminate recurring related-party transactions and settle related-party loans
(NASDAQ: GAME)

Service fees paid to these affiliates represent approximately 21.3% of Shanda Games' total net revenue.

(NASDAQ: GAME)

The aggregate consideration for the transaction is $811.5 million, subject to closing adjustments and payable in a combination of cash, deferred payments and settlement of an outstanding loan receivable from Shanda Interactive. 

(NASDAQ: GAME)

Despite the fair transaction price, I think this is a great deal for investors going forward. The transaction removes two cost components from the company's cost structure and is projected to improve EPS by approximately 40%-50%.

Final note

The three companies mentioned in this article will reap the fruits going forward. All three are doing what it takes to become a winner. Investors can still jump on the bandwagon and profit from it.

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Johan Seijkens has a position in Zynga and Shanda Games. The Motley Fool recommends Giant Interactive Group. 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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