The gaming industry is booming, and three companies make up the vast majority of the segment.
In this clip from Industry Focus: Tech, Motley Fool analyst David Kretzmann talks about which of the three -- Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two Interactive (NASDAQ:TTWO) -- is his favorite as a long-term investor, and the opportunities and risks of each one.
A full transcript follows the video.
This video was recorded on May 26, 2017.
Dylan Lewis: It seems like a lot of things are moving in the right direction for these companies. Not surprisingly with the run these stocks have gone on, they're not cheap by any means on a typical P/E basis for valuation. All of them above market multiples right now. I teased that I would have to ask you if you had a favorite among the lot. Is there one that you particularly like, or think is a little bit better positioned right now, maybe a more attractive valuation, something like that?
David Kretzmann: I'll probably give you a long answer here. The short answer is I like all three, I personally own all three, full disclosure there. Take-Two Interactive is really interesting if you're looking for a little bit higher-risk, high-reward situation. As you mentioned, they're quite a bit smaller than EA or Activision. They don't have quite the breadth of franchises that those two leading companies do. But, what I'm really impressed with is, even though they delayed Red Dead Redemption 2 to essentially the next fiscal year, they're still guiding for record profitability for this coming year, even though they don't have any other major titles slated to be launched this year. I think that's really impressive. And based on the guidance that management gave, they're only trading in about 18 times forward earnings. So, that's one that I'm taking a closer look at, because based on today's numbers, it does look a little bit pricier, but despite that major game delay to next year, they're still looking to do just fine. Activision is really interesting. I would look more and more at Activision as a miniature Disney, the way that they are approaching it. They want to become the ESPN of e-sports, so they have a new e-sports segment that's about a couple years old now. And they actually brought on the former head of the NFL Network and ESPN to head up this new e-sports segment under Activision Blizzard's umbrella. They recently launched a consumer goods segment, so, trying to bring that intellectual property to toys and --
Kretzmann: Yeah, stuff like that. So, really following Disney's footsteps there. They see opportunities for advertising, especially with those 350 million monthly active users on the King Digital mobile games. And they also have a movie and TV studio. So, they're trying to build out a cinematic universe for Call of Duty, which might be in the works over the next couple years.
Lewis: They've tried doing that a little bit with Warcraft, right?
Kretzmann: A little bit. That Warcraft movie wasn't under their own studio, that was an external studio, so they can't be blamed too much for that. It got kind of poor reviews. But, they do have a kids show, Skylanders Academy, based on their Skylanders game. The first season launched on Netflix last October, the second season is launching this year, and Netflix signed it on for a third year, so that's a promising start. But, with all those different segments, you can see that Activision probably has the biggest vision of all these different companies, just in terms of seeing their IP extending well beyond just the video games themselves.
So, if I had to pick one of them, it would probably be Activision. But I like the position that all of these are in. Take-Two, higher risk, high reward, I would probably make that a smaller position. EA, I love what they're doing with Ultimate Team, that competitive gaming aspect, especially with the sports games. I think having the access to that Star Wars IP and being able to pump out those games, I don't see how that doesn't do really well over the next few years as more Star Wars movies come out. And Activision has a whole breadth of different opportunities for them, and how they extend that IP beyond video games. So, I like all of them, but I think if you forced yourself to pick one, Activision would probably be the one. They pay a small dividend since 2010. They're just the bigger idea of the three. And why not just go with all three?
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David Kretzmann owns shares of Activision Blizzard, Electronic Arts, NFLX, Take-Two Interactive, and DIS. Dylan Lewis owns shares of DIS. The Motley Fool owns shares of and recommends Activision Blizzard, NFLX, Take-Two Interactive, and DIS. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.