Are Video Games (Finally) Good Investments?

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.

The biggest thing to come out of Silicon Valley in years
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 AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2944976, ~/Articles/ArticleHandler.aspx, 8/31/2015 10:11:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 55 minutes ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:59 PM
GLUU $4.59 Up +0.06 +1.32%
Glu Mobile, Inc. CAPS Rating: ***
CMCSA $56.33 Down -0.45 -0.79%
Comcast Corp CAPS Rating: ***
EA $66.15 Down -1.76 -2.59%
Electronic Arts CAPS Rating: ***
KING $13.33 Down -0.17 -1.26%
King Digital CAPS Rating: *