This Massive Hedge Fund Company Is Investing in Games

Should you play along?

Feb 17, 2014 at 11:30AM

The latest 13F season is commencing, when many money managers issue required reports on their holdings. It can be worthwhile to pay attention, as you might get an investment idea or two by seeing what some major investors have been buying and selling.

For example, consider Bridgewater Associates, one of the world's largest hedge fund companies. According to its recently released 13F statement, the company has initiated positions in Activision Blizzard, (NASDAQ: ATVI), Electronic Arts (NASDAQ:EA), and Microsoft Corporation (NASDAQ:MSFT). This demonstrates some confidence in the world of video games, which makes sense given that some expect that market expected to top $100 billion in value this year.

Activision Blizzard is the country's largest video game company, having developed and published franchises such as Call of Duty, Skylanders, World of Warcraft, StarCraft, and Diablo. Bulls are looking forward to the releases of the new PlayStation 4 and Xbox One video game consoles driving more sales of games. Activision Blizzard also has updates for many games in its pipeline and hopes to have a new blockbuster on its hands as it releases Destiny later this year. The company has outperformed Wall Street's profit estimates in each of last year's four quarters, with strong sales across multiple genres and platforms. Analysts expect revenue and earnings to grow by 8% and 37%, respectively, this year.

Electronic Arts has had a mixed past, being named the "Worst Company in America" (twice) by Consumerist in part for what critics have called recent shoddy software output. The company offers plenty of reasons to be hopeful, though, as it releases its anticipated game Titanfall next month. With the World Cup taking place this summer, its FIFA soccer games are likely to get a boost. Meanwhile, December sales were good, with three Electronic Arts titles among the top 10 sellers. The growth of digital software sales also bodes well for Electronic Arts' bottom line. In its last quarter, the company beat earnings expectations but posted revenue that fell $9 million short.

Microsoft has a new CEO in Satya Nadella, and he has a lot of work to do. Microsoft's fourth quarter was strong, with revenue up 11% and earnings dropping 4%, far less than expected. Sales of devices and hardware (a category that includes Xbox gaming consoles) surged 68%, but profit margins contracted. Bulls have high hopes for Microsoft's cloud computing moves, and they also note that PCs aren't exactly dead yet. Many are also waiting to see how the company's purchase of Nokia's (NYSE:NOK) core assets will work out. (The handset business was an underperformer for Nokia, putting pressure on its profit margins.) There is a lot to worry about, though. Bears see limited growth prospects in the face of strong competition and don't love the pricing of Microsoft's Office. There's talk that the company's Surface tablet, which has been underperforming, might be on its way out. The Xbox One hasn't been flying off the shelves, either, and that can hurt Electronic Arts, as its Titanfall game is a title exclusive to the Xbox. (On the other hand, demand for Titanfall could drive Xbox sales.) Patient believers in Microsoft do have a 3% dividend yield to enjoy.

If you're interested in the video-game industry, look at Take-Two Interactive (NASDAQ:TTWO) as well. It's not among Bridgewater's holdings, but it holds a lot of promise. Its Grand Theft Auto V game was 2013's best seller and is among the top-selling games of all time. Its NBA2K basketball game franchise is also a strong performer. With a forward P/E ratio near 10, it seems attractively priced as well.

Will this new market explode like video games?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now, for just a fraction of the price of Apple stock. Click here to get the full story in this eye-opening new report.

Selena Maranjian owns shares of Activision Blizzard, Apple, and Microsoft. The Motley Fool recommends Activision Blizzard, Apple, and Take-Two Interactive and owns shares of Activision Blizzard, Apple, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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