Many people think they can immediately make a fortune in the stock market. But frankly, very few people who try to aggressively make money in stocks end up succeeding, and if they do, it was because of sheer luck. The only way you can dependably make money investing in stocks is to buy and let the magic of compound interest do its thing.
But the big question is: What specific stocks should I buy for my portfolio? I think a great sector to target is video games. The gaming market has grown steadily over the past 50 years through increased technological sophistication and the proliferation of new consoles and mobile gaming devices like smartphones. In 2020, consumers spent $165 billion on video games around the globe. Analysts expect the market to potentially reach $583 billion in annual spending by the end of this decade due to the growth of cloud gaming, virtual reality (VR), and the mobile market.
This steady long-term tailwind makes the gaming industry a fantastic hunting ground for potential investments. With that said, Electronic Arts (EA -0.40%) and Nintendo (NTDOY 2.44%) are two video game stocks that can make you a fortune if you hold on to shares for 10 years or more. Let's take a closer look at why that's the case.
1. Electronic Arts continues dominance in sports gaming
Electronic Arts has been one of the leading video game publishers for decades. Through a steady buy-and-build strategy, the company has accumulated a wide variety of gaming franchises with millions of fans around the globe. In fact, the company reported over 600 million active user accounts on its EA player network last quarter. Getting a bit more granular, EA's stranglehold on the sports gaming market through its FIFA Soccer and Madden NFL franchises, both of which have dominated their respective categories for 20 years, plays a significant role in its widening user base.
That dominance in sports gaming should continue, as the company has an exclusive deal with the National Football League (NFL) to produce football simulation titles through 2025 that will likely get renewed in the future. FIFA Soccer has an even stronger position with dozens of licenses from soccer leagues around the world that no competing game publisher can match. This gives EA a virtual monopoly on the popular football and soccer simulation gaming markets.
EA has ridden the tailwind of the broader gaming market to stratospheric heights, with its revenue up almost 10,000% since 1990. Unless it loses its stranglehold on the sports category, I would expect this steady growth to continue over the next decade with new consoles, VR, and cloud gaming products coming to market. There are over 3 billion video game players worldwide today, less than half the global population of 8 billion. Many of these non-players are sports fans that will start playing video games this decade with the continued proliferation of smartphones and other computing devices. EA is the only company that can provide them with the most authentic football and soccer simulation gaming titles.
Currently, EA trades at an attractive valuation. Over the last 12 months, the business has generated $1.575 billion in free cash flow, which is a better profitability metric than net income for a gaming company, given the particular accounting standards applied to revenue recognition for the sector.
At a market cap of $34 billion, that gives the stock a price-to-free cash flow (P/FCF) of 21.5. While not an apples-to-apples comparison, that is only slightly above the S&P 500's average price-to-earnings (P/E) of 20 right now. For a company with such an impressive track record of sales growth, this looks like a great time to pick up some EA shares for your portfolio.
2. Nintendo is the 'Disney of games'
On the other side of the Pacific from EA is Nintendo, the Japanese gaming and entertainment giant. It has been around for decades in the family gaming genre, producing beloved hardware like the Switch and Wii, while also building durable entertainment franchises like Mario, The Legend of Zelda, and Animal Crossing.
This vertical integration of hardware and software gives Nintendo tremendous earnings power. This fiscal year, management is projecting a net profit of approximately $3 billion based on the current Japanese Yen to U.S. dollar exchange rate. At a current enterprise value of $36 billion when subtracting the company's $10 billion+ cash balance, that leaves the stock at an enterprise value-to-earnings (EV/E) ratio of just 12, which is much cheaper than the stock market average.
Nintendo should be able to continue earning money by selling video games for its first-party franchises. But what gets me most excited about the stock today is its expansion into other entertainment mediums, which makes me think it has a chance to be the next Disney. Management has invested hundreds of millions of dollars into theme parks, movies, and official Nintendo stores in recent years, its first major foray outside of video games. There are four theme parks coming in the next few years (one is open today) and The Super Mario Bros. Movie is planned for release in April this year.
It's hard to project how much earnings these new initiatives can drive for Nintendo over the next decade. But with how successful the company has been in the gaming market and how much fans love these characters, I think it could be quite profitable. The company's goal to diversify, while building upon its core success with video games, is why I think the stock will be a great one to own for the next decade.