Are Video Games (Finally) Good Investments?

Three gaming stocks might present upside value, but which has the most?

May 10, 2014 at 11:30AM

Glu Mobile (NASDAQ:GLUU) is a small company with bullish growth prospects. In most cases, this combination creates the possibility for large gains. However, Glu Mobile is not the only company with upside in the gaming space, as Electronic Arts (NASDAQ:EA) -- together with Comcast (NASDAQ:CMCSA) -- and King Digital (NYSE:KING) might also present good value. In other words, this is a segment of the market where investors might find gains, regardless of the market trend.

A value opportunity, but not alone
Glu Mobile has appreciated by more than 70% over the last 12 months. The company, which primarily makes video games for smartphones and tablets, is expected to grow 50% this year behind a variety of new game releases like Dear Hunter and Eternity Warriors.

Glu Mobile is small, with guided 2014 revenue of just $160 million, but has a large portfolio of games and is not completely reliant on any one in particular. For those seeking a speculative investment with an attractive valuation, Glu might be your company, but this doesn't mean Glu is alone in presenting value within the space.

A new partnership that could open doors and spark growth
Electronic Arts is king of the gaming space, or the largest company within the industry with games of all sorts. The company is expected to grow 5% in the coming year, with just over $4.1 billion in revenue. However, until this point, Electronic Arts has always grown at the rate of GDP, although new developments could be a top-line boost.

Clearly, Comcast is trying to find ways to distinguish itself from other cable providers, securing its 22 million subscribers. The latest attempt is a service with Electronic Arts to stream games on its X1 platform.

Comcast is set to face increased competition from big tech companies that are now entering the set-top space, but an exclusive deal with Electronic Arts gives the company a much needed edge. Furthermore, it gives Electronic Arts access to more than 22 million new customers. While it's unknown how lucrative this deal might be for Electronic Arts, it opens the door to a new industry, which might lead to similar deals in the future. Hence, Electronic Arts might be a good investment going forward.

Lastly, the newest company to the sector is King Digital, maker of Candy Crush Saga. While many are very skeptical of investing in a company that earns the majority (in this case, 73%) of its total bookings from one game, it's a company that's priced for disappointment, which means an upside surprise could be in store.

Specifically, the company had nearly $2 billion in net bookings last year, and $567.6 million in net income in the same period. Therefore, King trades at just 9.7 times earnings, which is a near 50% discount to the S&P 500.

Clearly, King is cheap, and the main reason is because investors are afraid that Candy Crush's usage will fall, like Farmville, after the company's gross bookings declined marginally in the fourth quarter versus the third quarter, following rapid growth in quarters prior.

Thankfully, there are reasons to be optimistic. First, Candy Crush's percentage of total bookings declined from nearly 80% in the third quarter to just over 70% in recent months, meaning other games are growing. Also, with month-over-month growth being a concern, SuperData recently estimated that spending rose 1.2% in March over February for the game. This shows Candy Crush still has its appeal. Hence, with the stock being so cheap, it likely presents a good opportunity.

Final thoughts
For several years, gaming revenue has been in a slump, but with two new game consoles late last-year, cable providers entering the space, and mobile becoming a large piece of the puzzle, there is reason to believe that gains could be plentiful.

With that said, Glu Mobile is small and could present a lot of upside if it can maintain momentum, while Electronic Arts has a good opportunity with Comcast. However, King Digital looks the best, as its value is unmatched in the space and its growth is most impressive.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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