It's a great time to be doing business in the video game industry. Gamers are spending a record number of hours engaging with titles, and they're also growing more comfortable making purchases through high-margin digital sales channels.
Those trends help explain why Activision Blizzard (ATVI), the industry leader, is the second-best performing stock on the S&P 500 so far this year.
Peer video game developers Electronic Arts (EA -0.84%) and Take-Two Interactive (TTWO -0.99%) are also trouncing the market as sales and profits surge higher.
Let's take a look at the major reasons why investors would want to purchase this booming industry's biggest companies.
|
Company |
Market Capitalization |
Annual Sales |
Price-to-Earnings Ratio |
|---|---|---|---|
|
Activision Blizzard |
$42 billion |
$6.6 billion |
43 |
|
Electronic Arts |
$32 billion |
$4.8 billion |
35 |
|
Take-Two Interactive |
$7 billion |
$1.8 billion |
137 |
Data Sources: Company financial filings. Annual sales are for the past complete fiscal year.
Top dog
Activision Blizzard was the industry's biggest player even before its 2016 purchase of King Digital pushed it to a new level. That acquisition added a massive user base of mobile players to its long list of assets that includes global brands like Call of Duty. That action powerhouse still dominates sales charts a decade after the release of the brand's first installment. King Digital also brought casual franchises including Candy Crush and Farm Heroes into the business mix.
Image source: Getty Images.
In addition to the world's biggest action franchise and several of the highest-grossing casual games in app stores, Activision Blizzard owns a leading subscription-based online title in World of Warcraft and several other important hits including StarCraft, Destiny, and Hearthstone.
Wall Street is drooling at the prospects for each of these properties to grow more profitable as game purchases move online. Activision is turning its titles into year-round businesses through frequent updates, too, which makes this intellectual property more valuable and longer-lived.
Additionally, the developer is aiming to branch out into growth areas such as e-sports and consumer products. Investors must pay up for that optimism, though: At over 40 times earnings, Activision shares are far more expensive than the broader market.
Stronger value
Like Activision Blizzard, EA has relied on its deep portfolio of game assets to generate consistent profitability and strong sales growth over the past five years. Its Battlefield action franchise frequently gives Call of Duty a run for its money, and EA supplements that tentpole brand with other hits including Need for Speed and The Sims. EA boasts a strong presence in sports games through its Madden and FIFA franchises, too.
The move toward a completely digital sales model is having a clear and profound effect on EA's business. Gross profit margin is set to reach 75% of sales this fiscal year -- up from 62% four years ago. Operating cash flow has more than doubled over that time as well, to just under $1.5 billion.
Its smaller status and less-dominant sales position limit EA's growth opportunities in relation to its bigger rival. Yet the company is still likely to see solid growth over the next decade, currently available at a relatively cheap 35 times trailing earnings.
Betting on growth
Take-Two doesn't have nearly the portfolios that EA and Activision have amassed. But its biggest brand is also one of the industry's most recognized franchises. Grand Theft Auto has sold more than 260 million units since it first came out over a decade ago.
Image Source: Take-Two.
GTA isn't on the one-release-per-year schedule that's helped keep Call of Duty on top of the sales charts for almost a decade, and that has translated into inconsistent results for shareholders. Take-Two crossed $2 billion in annual sales in 2014 and turned a solid profit, but saw revenue cut in half in the following year. The developer has booked net losses in three out of the past five fiscal years.
Take-Two has big plans to bulk up its portfolio over the next few years, not only with another Grand Theft Auto release but also ideally through introducing a few new hit franchise properties. There are plenty of risks involved in that strategy, which helps explain why this stock is a steal compared to peers. Investors can purchase Take-Two at just over four times revenue, compared to 6.5 for Activision and nearly seven for Electronic Arts.
