The One Industry You Must Own

Save for ER doctors, night watchmen, and infomercial addicts, most of us are probably in a deep slumber by the time our clock hits 2 a.m. each night. Not so for Motley Fool co-founder David Gardner. When he's not clearing out a hefty backlog of emails, answering posts on our discussion boards, or coming up with the next homerun stock idea, he's usually plugged in to one of his favorite pastimes: video games.

That's right, the man loves his games. He hosts a monthly board-game competition at Fool HQ. He's a regular contributor on our Computer & Video Gamers discussion board. There's even a rumor that he is the proud owner of every major game console from the Atari 2600 to the Xbox 360. The Atari 2600 made its debut in 1977, by the way. And yes, David is happily married.

Me, I usually prefer catching my Zs to duking it out with evil, zombie cyborgs on Fallout 3. Well, at least after midnight, anyway. But I do share David's enthusiasm for video games. In fact, if I had to invest all my meager savings in just one slice of the market and keep it there for 10 years, I'd pick video games faster than you can rob a sports car on Grand Theft Auto IV.

It's a numbers game
Why so much confidence in the industry? Let's start with a quick comparison between the S&P 500 and the average stock from my list of publicly traded video game companies:

 

S&P 500

Video Game Stocks

5-year earnings growth est.

10.2%

18%

operating margin

15%

27.3%

debt/equity

133.5%

5.6%

forward P/E

13.1

12.5

Source: CapitalIQ. S&P 500 is equal-weighted.

To be fair, the S&P 500 is weighed down by financial stocks, which tends to skew the numbers, particularly -- and unfairly so -- on the debt side. But the evidence is pretty clear. The average video game company is growing faster, is more profitable, has a cleaner balance sheet (only a handful of video game stocks have any debt whatsoever), and actually trades at a lower forward earnings multiple than the S&P 500.

A recent report out of PricewaterhouseCoopers (PWC) backs this up. According to last year's Global Entertainment and Media Outlook report, growth in the video game industry is set to outpace the growth of almost every other form of entertainment. In some cases, this is already happening. Sales of video game software eclipsed sales of DVD and Blu-ray movies for the first time last year. And get this, last year's Grand Theft Auto IV earned more in its first week ($500 million), than the entire box office take of Pirates of the Caribbean: At World's End.

Back to that PWC report. Global video game sales should rise from $41.9 billion in 2007 to $68.4 billion in 2012. Games made for consoles like the Playstation 3, Wii, and Xbox 360, will account for the majority of sales. Online games, led by Activision Blizzard's (Nasdaq: ATVI  ) massively popular World of Warcraft franchise and its 11 million subscribers, will see sales more than double from $6.6 billion in 2007 to $14.4 billion in 2012.

It's so much bigger than you think
But pure gaming outfits like Activision Blizzard are just the tip of the iceberg. Component makers like NVIDIA (Nasdaq: NVDA  ) , Logitech, and Sony (NYSE: SNE  ) are all hard at work developing next generation gaming platforms, graphics, and accessories.

Media and intellectual property companies like Disney (NYSE: DIS  ) have long-standing licensing deals with game publishers to produce games based on their content. Disney even started up its own game development company, Disney Interactive Studios.

Another nice little tidbit from that PWC report: Sales of games designed for mobile devices are going to surge from $5.6 billion in 2007 to $13.5 billion. You can bet that device makers like Apple (Nasdaq: AAPL  ) and Nokia (NYSE: NOK  ) are going to get a piece of that action.

Grab your front row seat
Enter this week's Electronic Entertainment Expo (E3) -- the video game industry's premier annual showcase in Los Angeles, Calif. David Gardner and I will be there, getting the inside scoop from nearly 200 companies and thousands of gaming executives, designers, entrepreneurs, and experts.

We'll get a sneak peek at upcoming games from industry heavyweights like Activision and Microsoft, as well as those from smaller, emerging game makers like Bethesda Softworks, Perfect World, Take-Two Interactive (Nasdaq: TTWO  ) , and THQ.

Want to find out which games David is most excited about? Want an insider's take on gaming-related stocks in your portfolio? Want to hear which companies we think will profit most from the gaming sector's extraordinary growth over the next decade and beyond?

A free trial of our Stock Advisor service gets you exclusive access to all our special reports from the E3, plus instant access to Motley Fool co-founders David and Tom Gardner's favorite stocks for new money right now. Hint: A gaming company tops their list this month! Here's more information.

Matthew Argersinger doesn't own any of the stocks mentioned. Apple, Activision Blizzard, Walt Disney, and NVIDIA are Motley Fool Stock Advisor recommendations. Take-Two Interactive Software is a Motley Fool Rule Breakers pick. Walt Disney and Nokia are Motley Fool Inside Value picks. Logitech International is a Motley Fool Hidden Gems selection. The Fool owns shares of Logitech. The Motley Fool has a full disclosure policy.


Read/Post Comments (10) | Recommend This Article (68)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2009, at 6:40 PM, kellogg9 wrote:

    THe videogame industry is recession proof as has been known for some time and have held several videogame stocks in my portfolio for several years to weather bad stocks that i might pick during any given year. It's worked well for me. I also hold Nintendo which has done very well for me (at least prior to the economic problem).

    Kelly

    http://www.stockcoupons.com/

  • Report this Comment On June 01, 2009, at 11:17 PM, rampaginggnome wrote:

    I've been gaming, electronic and tabletop, since the venerable Atari 2600. If I had to choose now between cable and Warhammer online, the game would win without a second's thought.

  • Report this Comment On June 02, 2009, at 8:42 AM, insight999 wrote:

    All of us invest with the goal of making money & I agree that gaming is likely to be a profitable industry in which to invest. I'm deeply concerned however with the violent, anti-social nature of many of the most popular games. Thoughts are things; everything manmade began as a thought. What we habitually think and feel, we bring into our daily external reality. As these games become more realistic, they de-sensitize individuals to thoughts and acts of violence and greed. Many are rooted in an "I win - You lose" attitude. Just try to teach your kids (or even work up personal enthusiasm,) to respect the property or person of another human being after they have been playing Grand Theft Auto or assorted blow-em-ups for an hour!

    Collectively, we have created the economic and social world we're experiencing now. We vote with our dollars. I encourage all who are buying gaming stocks to agitate for games that give an adrenaline rush without degrading persons or property.

  • Report this Comment On June 02, 2009, at 9:17 AM, 31Purpleproverbs wrote:

    I could not have stated my sentiments better than insight999 did. Any tool can be used for good or evil.

    So, if it is inevitable that people will be gaming, is there a company which has successfully developed intruiging games that assist in academic learning?

    I realize this is a very tall order, however aren't we responsible for the mind's and hearts we are training?

    It looks as if we all could fill our pockets with profits from gaming - but is it worth the price we will end up paying for law enforcement, prisons, absent fathers, and lost personal relationships? Is there any company that has developed something positive?

  • Report this Comment On June 02, 2009, at 2:32 PM, dbbfool63 wrote:

    I blame the Government in regards to insight999 comment, "Collectively, we have created the economic and social world we're experiencing now", because they are the criminals on every level that have shown us the way. When your children get in there upper teens and start watching movies that explicitly show how crime and the law work, or should I say don't work, I think when they play these games your talking about, they are really trying to beat the bad guy, or law because they have learned that neither one are enforced.

    It's all about how you teach your children which was said by insight999, I agree, don't keep or try to hide these things from your children, let them see or play it and then sit down and talk to them about it and explain the difference between reality and the game or movie because these kids will find there way to experience it. It's up to you to see how they do it.

    Only little children will play a non-violent educational game, and there are some toy companies who have been making special systems with limited titles and that is the time to teach them. It's all about money so you might as well face it that the most violent and realistic games with always get the highest sales.

    My son played and still does, every violent game ever made and he has been to Iraq twice now and is a Special Ops in the 82nd Airborne so either I did something right when raising him, or the games had no affect on the kind of life he is leading.

  • Report this Comment On June 04, 2009, at 5:53 PM, Wisenvestor wrote:

    WHAT does this have to do with investing? If you invent a blockbuster game that gives you an adrenaline rush without violence and greed I'm sure we would all love to invest. It's all wishful thinking. In the real world we look for what is happening and try to be head of the trend. This dialogue would be better in Christian Digest or Ladies Home Journal.

  • Report this Comment On June 05, 2009, at 3:51 PM, JPMoregen wrote:

    "WHAT does this have to do with investing?"

    Investing in the future is and has has always been one of the cornerstones of investing, in whatever form.

  • Report this Comment On June 05, 2009, at 5:27 PM, drdon53 wrote:

    There are so many games and game companies that appeal to wide audiences. Check out Casual Game companies, Serious Game companies to find products that are not violent and are intended to teach. Both segments are growing.

    Getting in the game world is not a sure thing though. As always you have to do your homework. Ask Sumner Redstone about Midway Games for example :-)

  • Report this Comment On July 31, 2009, at 9:40 AM, vishtr wrote:

    Nintendo is losing revenues. Playstation is hurting Sony's bottom line. Xbox 360 sales are up, but at the cost of profit as they cut the prices to compete with Nintendo.

    Xbox and Playstation need to stop competing with Nintendo and focus on each other. Nintendo is selling a product that is geared to an audience they will not have, because of the games their systems have.

    I really don't see this industry expanding much more. Nintendo pushed some good expansion by marketing to a different crowd, but that's slowing at a dramatic pace (I think the market is saturated).

    I'd stay away from investing in these. Maybe some small game publishers, but the risk in that industry is huge. The majority of small video game companies go under. If you want the risk, invest in BOA.

  • Report this Comment On August 10, 2009, at 3:38 PM, sempire wrote:

    I think the way that we play video games, and interact online through video games is still in its infantry. Since we can do more with the technology surrounding the games, and have the interoperability in the real world, with the real world. There is yet still so much to come.

    I have been looking at this startup called Gameskore (www.gameskore.com) and it looks like they are on to something.

    Unfortunately at this time a lot of these companies are private, but video games is a big market, and I would love to get my hands on some of these companies because I can imagine the returns on such first to the market type of services.

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