All anyone seemingly wanted to talk about in 2020 and 2021 was cryptocurrency. With the price of every digital currency going "to the moon," for a while there, it looked like all you could do was win by owning crypto tokens. It was that dynamic which provided the clearest signal that this sector of the economy was building into a speculative bubble.
The cryptocurrency bubble popped with a vengeance throughout 2022, with an estimated $2 trillion in value wiped away in just a few short quarters. This shouldn't be all that surprising if you acknowledge that cryptocurrencies generally haven't proven themselves to be stable investments. For some (including me), they are the equivalent of magic beans with no underlying intrinsic value and were seemingly created just to suck money out of your retirement nest egg.
Long-term investors will be much better off avoiding the cryptocurrency space. A better option with much more assured potential is to invest in these three video game stocks. They have what it takes to build long-term wealth.
1. Electronic Arts: Dominance in sports games
My first -- and possibly favorite -- video game company to track is Electronic Arts (EA 1.07%). The gaming publisher has been a leader in the industry for decades, first with sports titles like FIFA Soccer and Madden NFL but now increasingly in non-sports titles like Apex Legends, The Sims, and Star Wars Jedi: Survivor. Riding the tailwind of video game consumption over the last few decades, EA is one of the best-performing stocks of all time, with a total return of close to 27,000% since going public 30-plus years ago.
EA has two big developments for investors to track this year. First, it has a huge sequel title called Star Wars Jedi: Survivor launching at the end of this month. Its predecessor, Star Wars Jedi: Fallen Order, sold at least 10 million units (EA didn't disclose the exact number) when it launched a few years back, and it is possible the sequel can surpass this commercial feat. At a $70 retail price point, 10 million unit sales equate to hundreds of millions in gross revenue for EA, which could drive meaningful consolidated growth this fiscal year.
The second important event for EA shareholders to watch is its transition for its soccer title -- its most lucrative franchise -- from the name FIFA Soccer to EA Sports FC. EA broke away from the worldwide soccer governing body last year after FIFA asked for a huge price increase to license the FIFA name, bringing all the worldwide leagues along with it. Investors should be tracking whether FIFA goes for another partner to try and build a video game under its name or if EA can retain its monopoly position within the industry. If it can, that is great news for shareholders.
If EA can keep launching innovative titles like the Star Wars Jedi series and continues its dominance in sports gaming, the stock will likely perform steadily for shareholders over the long term.
EA Total Return Level data by YCharts.
2. Nintendo: Finally expanding outside of games?
By far, the most interesting (and mysterious) company in video games is Nintendo (NTDOY -1.07%). Dominating the industry for decades, the Japanese hardware maker and inventor of the Mario, Zelda, and Animal Crossing franchises plays by its own rules and has built a family-friendly gaming empire in the process.
Historically, Nintendo has kept its world-renowned franchises strictly to video game content. This is quite lucrative, especially when combined with its own video game hardware devices. Since the start of 2020, Nintendo has generated over $3 billion in annual operating income and hit $4 billion in profits over the last 12 months, even with the Japanese yen greatly depreciating vs. the U.S. dollar.
But now, Nintendo has made moves to expand beyond gaming into new entertainment categories. It just released an animated film co-produced with Illumination Studios called The Super Mario Movie that is on pace to hit over $1 billion in box office sales and become one of the top-grossing animated films of all time. In conjunction with Comcast-owned Universal Studios, it is opening four Nintendo-based theme parks around the globe this decade as well.
Combine these two other entertainment categories with the profitable gaming business, and I think Nintendo will be a strong performing stock for years to come.
NTDOY Operating Income (TTM) data by YCharts.
3. Activision Blizzard: Merger arbitrage and a resurgent studio
My last pick is in a bit of a tricky situation but, nevertheless, is set up to bring positive returns to shareholders. It is Activision Blizzard (ATVI), one of the largest video game publishers in the world, which is currently in the middle of being acquired by Microsoft (MSFT 1.44%) for $95 a share. Today, Activision trades at a price of $85, meaning that investors can earn a 12% return in just a few short months if the deal goes through on its expected timeline this summer.
You cannot precisely quantify how likely it is that global regulators will approve the acquisition, but from my seat, it looks increasingly likely. Major European regulators have written favorably for the deal after Microsoft promised to distribute Call of Duty for at least 10 years on all major platforms that compete with its Xbox gaming ecosystem, like Sony's PlayStation, Steam, Nintendo, and Nvidia. There is still some uncertainty here; if you follow the industry closely, you'll understand there are no anti-competitive worries with this deal. Xbox is significantly behind PlayStation, Steam, and Nintendo in active players, so this is not a dominant industry leader trying to build a monopoly position.
Even if the merger does not get approved this summer, I think this is a "heads I win, tails I don't lose" situation. Why? Because the Activision business looks to be in great shape compared to a few years ago. Its mainstay Call of Duty franchise is firing on all cylinders at the moment, the mobile studio King keeps putting up consistent revenue and earnings growth, and its Blizzard studio has a huge lineup of games in the pipeline, including the highly anticipated Diablo IV title. In the long-term, I think this means consistent cash flow generation that Activision can return to shareholders, making the stock a great pick regardless of whether the deal gets approved by regulators.
