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|Market Cap (in Billions)
|Gaming Industry Growth Thesis
|Provides great content and online gaming growth
|Not as great as Activision, but much cheaper
|Controls much of the booming Chinese online gaming space
|Oculus Rift VR and social platform will work together for gaming success
|PlayStation platform and VR could be industry leaders, move the needle for Sony
|Top chip maker powering gaming company growth
The content creators
Activision Blizzard has had a great year, and in the most recent quarter it handily beat expectations, with a 112% rise in sales and 315% rise in earnings per share year over year. This rise was due in part to a 13% increase in monthly active users. Activision is one of the top performers in the content-creation space of this market, largely because of its pipeline of new games that players are clearly loving, such as Overwatch, which was released in May and became an instant hit with, more than 7 million players in its first week after launch.
Activision has also been incredibly successful with its switch to more in-game purchases and subscription content, which help revenue to stream in long after a title is purchased, making this one of the best online gaming stocks. On the mobile side, Activision bought King Digital, the maker of Candy Crush, in February and has been very successful in integrating this property to expand its mobile and digital presence. In the most recent quarter, digital sales rose to $1.4 billion, up 129% year over year.
Activision’s largest competitor, Electronic Arts (NASDAQ:EA), has also produced some winning games as of late, such as its Star Wars Battlefront series, and has shown itself adept at making a play for the online gaming space as well. While EA’s sales growth has been less impressive than Activision’s — up just 6% in the most recent quarter year over year — it still looks as if it has plenty of potential to grow in this space, which is why analysts at Morgan Stanley said in September that both companies look like good bets. To make EA even more attractive, it also trades at nearly half the P/E of Activision.
Both Activision and EA are clamoring to make a name for themselves in China, where video-game sales are booming and there are an estimated 700 million mobile users. A good play on this market specifically could be local NetEase (NASDAQ:NTES). This Chinese internet gaming company also offers many online services, such as email and advertising, but it’s a dominating force in the booming gaming space, offering online gaming packs. NetEase also partners with Activision Blizzard to distribute many of its games throughout China. Another Chinese player worth mentioning is Tencent, which acquired the popular Riot Games in 2015. Similar to King Digital, Riot Games has had some major mobile game hits, such as Blitzcrank’s Poro Roundup, and is helping Tencent to build out its own niche in the Chinese (and worldwide) gaming market.
Will virtually reality be the next big bet in gaming?
While much of the gaming focus has moved to mobile or computer desktop play, the original video-game system makers still have much to gain from the number of users of their equipment. However, new systems have proved to be only incrementally better in the most recent models, and it might prove wise to look at what new technology can really move the needle going forward. Virtual reality (VR) could be just that.
VR has gotten a lot of attention lately, as companies such as Facebook (NASDAQ:FB) invest in bringing the technology to the mass market. As VR headsets become cheaper and easier to acquire for average gamers, the companies producing this hardware could be set for big gains. Facebook is an interesting choice with its Oculus Rift, since the company also has such a large user base and a track record of online games on its platform performing very well. Of course, Facebook is such a mammoth company that even if its Oculus Rift is very successful, it may only slightly move the needle for Facebook’s total sales.
Sony (NYSE:SNE), on the other hand, is much more dependent on its gaming segment, which now makes up more than 20% of its total revenue, and in the most recent quarter it was the fastest growing division, reporting sales up 14% year over year, compared with a 10% drop companywide. Sony’s gaming segment growth is driven by the PlayStation gaming console and equipment, and this segment could make up much of Sony’s growth in the years to come. Sony’s recently launched VR system, which is used in conjunction with the popular PlayStation 4 console, is already getting great reviews ahead of the holiday season. To be fair, VR is still largely untested as to whether it will drive profits renewed for Sony, but so far the industry buzz looks positive.
Powering this growth — the chipmakers
The content being produced and the hardware it’s played on creates a stunning overall experience for players — but none of that would be possible without the incredibly powerful chips that power those graphics and the code the games run on. One of the best companies to bet on this portion of the gaming market is NVIDIA.
NVIDIA has been one of the pioneers in creating chips that can create the fast-moving and intricate visualizations in modern video games, powering games for nearly every major gaming company. NVIDIA also makes chips for the automotive industry’s tech growth, and it will be an important voice in virtual reality and even artificial intelligence. NVIDIA stock has gained over 150% in the past 12 months, thanks to its incredible growth in sales and earnings, which were up 24% and 873%, respectively, in the most recent quarter year over year. NVIDIA is not cheap as a result, trading at a P/E of 47, but that price tag seems to be warranted, based on the company’s ability to be the premium chipmaker not only for videogame growth but also for some of the most exciting tech growth of the decade.
Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Facebook, and Nvidia. The Motley Fool recommends Electronic Arts and NetEase.