Investing in the Video Game Paradigm Shift

The video game industry might change in a big way -- here's the best way to invest.

May 26, 2014 at 10:00AM

The video game industry could see one of the most meaningful shakeups that we've seen in a number of years. Comcast (NASDAQ:CMCSA) and Electronic Arts (NASDAQ:EA) might be partnering to stream games via the TV set through a service that would bypass major entertainment consoles. With this new partnership, EA games would be available to Comcast subscribers.

The move is mutually beneficial. It'll help Comcast protect itself from the likes of the Microsoft Xbox One and Sony PlayStation 4, which both consider themselves entertainment systems rather than just gaming consoles. Gamers who use Comcast's platform to play games will be able to use their tablets as controllers.

Just how big is this deal?
The move will also better position Comcast to compete with and its FireTV, as well as Apple and its Apple TV. If the Comcast-Time Warner merger goes through, the merged company would be the largest cable provider in the U.S. That makes the deal even more significant for EA.

The deal comes as EA is trying to take on the secular decline of video consoles head on. Hopefully Comcast will help EA further monetize its robust portfolio of game franchises, including FIFA and Madden NFL. However, EA has actually been doing really well in other areas, which include increasing its revenues from digital downloads.

The other key for EA is that it has a partnership with Disney that will let it develop games based on upcoming Star Wars movies.

The competition
One of EA's biggest competitors is Activision Blizzard (NASDAQ:ATVI). Activision's top franchises include Call of Duty, Skylanders, and World of Warcraft. Activision still relies heavily on these key franchises--together, the three accounted for 80% of its 2013 revenue. This could become a big issue for Activision since its World of Warcraft franchise is in decline. At the end of 2013, its World of Warcraft game only had 7.8 million subscribers, compared to 9.6 million at the end of 2012. 

Both EA and Activision announced their earnings earlier this month. EA popped 12% in a single day after beating fiscal fourth-quarter earnings estimates and raising its guidance. EA beat the earnings consensus by 330%. It guided for fiscal 2015 earnings to come in at $1.85, which was well above the $1.52 consensus.

Activision also increased its guidance, but nowhere near as much. It also beat the consensus, by 90%. The company is also seeing strength in digital. Its digital-channel revenue was up 23% year-over-year last quarter and this made up 68% of its total revenue. Unfortunately, it lost 200,000 subscribers for its World of Warcraft during the quarter.

How the shares stack up
EA trades at around 16.7 times next year's earnings estimates. In comparison, Activision trades at 14.5 times. When you look at the two companies on a P/E to growth, or PEG, ratio basis, EA is the better buy. Its PEG ratio is 0.8 while Activision's ratio is 1. EA also has a debt-to-equity ratio that's well below that of Activision, as the companies have ratios of 24% and 62%, respectively. Where Activision does win out is on income--Activision's dividend yield is 1%, while EA currently doesn't pay a dividend. 

As far as Comcast goes, it trades at a P/E of 15 based on next year's earnings estimates. Its PEG is also a reasonable 1, and its dividend is higher than that of Activision at 1.8%. However, Comcast has an 89% debt-to-equity ratio.

Bottom line
EA is ahead of its competition in the process of diversifying beyond revenue from console games. The Comcast deal would be a key move for both companies. Even with the run-up in shares, investors who are interested in adding some video game exposure to their portfolios should give EA a closer look.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends AAPL, AMZN, ATVI, and DIS. The Motley Fool owns shares of AAPL, AMZN, ATVI, DIS, and MSFT. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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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