Game on: Three gaming plays

January 22, 2016 01:00 PM

Video games have been popular for a long time. Even as Pacman, Donkey Kong, Mario Brothers are still relevant, game developers are enjoying a new generation of phenomenal growth due to a variety of factors, including: 

  • New gaming consoles lead to a new wave of game buying. 
  • Games are getting better and better, which makes them more addictive, which leads to more money spent on them. 
  • Digital download of videos creates fatter profit margins for developers. Also, it has led to a whole new eco-system of extra downloadable content to enhance the gamer experience and to drop more dollars to their bottom line. 

There are many quality names in this space, but these three stand out above the pack (see “Gamers”). 

Activision Blizzard (ATVI): During the last three quarters this company has sported an average earnings surprise of 164%. With titles like Call of Duty and World of Warcraft the reason for these gains becomes more obvious. With more growth expected ahead there is good reason to download these shares into your portfolio.  

Electronic Arts (EA): They are best known for their sports franchises like Madden NFL as well as top games for soccer, hockey and basketball. Yet, the current excitement surrounds the rebirth of the Star Wars movie franchise and what that means for its games based on the popular series. It is expected that they will sell 13 million copies of the Star Wars Battlefront game and then tack on millions in extra revenue from downloadable content. It seems like “the force is strong” with this stock. (Note that the author of this article personally owned shares of EA at the time the article was written).     

Take-Two Interactive (TTWO): Grand Theft Auto is their marquee franchise, with other solid performers like the WWE wrestling titles and lots of popular titles for the youth market. Indeed, there was a bit of a stumble early in 2015 with earnings headed lower year-over-year. That seems to be on the mend with their most recent earnings report coming in at 19¢ when only 3¢ was expected. Their product pipeline looks impressive going forward, which is why EPS is expected to rise 113% next year.  

Overall, Activision and Electronic Arts are considered the quality picks in the group with the latter being the most consistent earnings performer, which explains why shares are up more than 200% the last two years. TTWO is the riskier pick given recent operational stumbles. However, with that extra risk comes the potential for extra reward if the turnaround does come to full fruition.

About the Author

Steve Reitmeister is the executive vice president at Zacks Investment Research at zacks.com. The cornerstone of the firm is the Zacks Rank stock rating system and its 26% average annual return since 1988. These results have been examined and attested to by the independent accounting firm Baker Tilley. @ZacksResearch