LOS ANGELES - Video game fans are descending on the industry's massive conference here this week looking for the latest digital thrills. Behind all the gamers, investors are searching for something else in the form of ways to make money. And they do exist.
A vast majority of the biggest companies involved in gaming, from Microsoft (MSFT) to Electronic Arts (EA) to Activision Blizzard (ATVI), have been big winners for investors the past twelve months. The eight major video game companies with U.S. shares have seen their stocks gain an average of 11% the past 12 months, which far outperforms the 0.9% decline by the Standard & Poor's 500 during the same time.
Given a reinvigoration in interest in video gaming because of new consoles announced this week, plus new innovations like virtual reality from giants like Facebook (FB) and the popularity of mobile games, investors are looking to get a new high score for their portfolios.
"Yes, you can absolutely make money on video games," says Michael Pachter, video-game stock analyst at Wedbush Securities. He says some of the best opportunities for investors are video-game publishers that are able to capitalize on the arms race between Microsoft and Sony to push the technological frontier with new and more powerful devices.
It's that battle among the big players that's changing the game a bit for the better for investors. Microsoft and Sony signaled this week a new world for gamers is coming that could potentially be more profitable than past cycles. Previously gamers had to wait about five years for upgrades to their systems. But both companies are announcing new upgraded devices just a few years after their last devices were launched. The result is faster innovation and more compelling content for consumers, Pachter says.
When it comes to growth, it's hard to top Activision, the publisher of hits like "Call of Duty," "World of Warcraft" and "Destiny." Analysts are calling for the company to earn $1.85 a share this year, up 40% from the same period a year ago. CEO Robert Kotick has decades of experience navigating the cycle of launching new properties versus leveraging existing titles to maximize profit. Shares of Activision Blizzard are up 51% to $38.41 the past 12 months, making the company worth $27.8 billion - more than than other major video-game publisher with U.S. shares. Activision also just bought King Digital, adding mobile games like "Candy Crush" to the company's diversified lineup.
Activision's key rival, Electronic Arts, has top-shelf games like "Battlefront" and titles based on "Star Wars."
Some investors might like the diversification of buying into the major hardware makers, like Microsoft and Sony. There are drawbacks with that approach, though. Sony might be a major seller of hardware and also a game publisher: Its Game and Network Services unit accounts for 20% of revenue the past 12 months and 30% of operating profit before tax. But the stock is down 22% over the past 12 months as the company's mobile unit continues to lose millions and diluting gains in games.
There are risks, too. Innovation and change in the industry can disrupt companies quickly. GameStop (GME), which is a top reseller of games, has seen its shares sink nearly 40% the past 12 months as gamers increasingly download software rather than go to a store in a mall to buy a disk.
But the bottom line is gamers are willing to spend for more power. And more power is coming sooner than people would have expected a year ago. "Faster processing power and resolution enhancements may be the primary incremental consumer value proposition," says Stephen Ju, analyst with Credit Suisse.
KEY VIDEO-GAME STOCKS WITH U.S. SHARES *
Company, Symbol, 12-month stock %, Upside to target, P-E **
GameStop, GME, -40.1%, 37.6%, 7.0
Nintendo, TSE:7974, -25.7%, 31.9%, 111.8
Sony, TSE:6758, -22.3%, 24.7%, 24.9
Zynga, ZNGA, -13.5%, 14%, NA ***
Microsoft, MSFT, 8.4%, 15.3%, 38.7
Electronic Arts, EA, 18.8%, 13.6%, 21.2
Activision Blizzard, ATVI, 51.2%, 9.4%, 33.8
Take-Two Interactive, TTWO, 35.7%, 6.2%, NA ***
Ubisoft, ENXTPA:UBI, 89.3%, -3.1%, 39.6
Source: S&P Global Market Intelligence, USA TODAY
* includes both ADRs and off-exchange listed shares
** Based on past 12 months of adjusted profit
*** Posted a loss
