The One Industry You Must Own

Save for ER doctors, night watchmen, and infomercial addicts, most of us are probably in a deep slumber by the time our clock hits 2 a.m. each night. Not so for Motley Fool co-founder David Gardner. When he's not clearing out a hefty backlog of emails, answering posts on our discussion boards, or coming up with the next homerun stock idea, he's usually plugged in to one of his favorite pastimes: video games.

That's right, the man loves his games. He hosts a monthly board-game competition at Fool HQ. He's a regular contributor on our Computer & Video Gamers discussion board. There's even a rumor that he is the proud owner of every major game console from the Atari 2600 to the Xbox 360. The Atari 2600 made its debut in 1977, by the way. And yes, David is happily married.

Me, I usually prefer catching my Zs to duking it out with evil, zombie cyborgs on Fallout 3. Well, at least after midnight, anyway. But I do share David's enthusiasm for video games. In fact, if I had to invest all my meager savings in just one slice of the market and keep it there for 10 years, I'd pick video games faster than you can rob a sports car on Grand Theft Auto IV.

It's a numbers game
Why so much confidence in the industry? Let's start with a quick comparison between the S&P 500 and the average stock from my list of publicly traded video game companies:

Source: CapitalIQ. S&P 500 is equal-weighted.

To be fair, the S&P 500 is weighed down by financial stocks, which tends to skew the numbers, particularly -- and unfairly so -- on the debt side. But the evidence is pretty clear. The average video game company is growing faster, is more profitable, has a cleaner balance sheet (only a handful of video game stocks have any debt whatsoever), and actually trades at a lower forward earnings multiple than the S&P 500.

A recent report out of PricewaterhouseCoopers (PWC) backs this up. According to last year's Global Entertainment and Media Outlook report, growth in the video game industry is set to outpace the growth of almost every other form of entertainment. In some cases, this is already happening. Sales of video game software eclipsed sales of DVD and Blu-ray movies for the first time last year. And get this, last year's Grand Theft Auto IV earned more in its first week ($500 million), than the entire box office take of Pirates of the Caribbean: At World's End.

Back to that PWC report. Global video game sales should rise from $41.9 billion in 2007 to $68.4 billion in 2012. Games made for consoles like the Playstation 3, Wii, and Xbox 360, will account for the majority of sales. Online games, led by Activision Blizzard's (NASDAQ:ATVI) massively popular World of Warcraft franchise and its 11 million subscribers, will see sales more than double from $6.6 billion in 2007 to $14.4 billion in 2012.

It's so much bigger than you think
But pure gaming outfits like Activision Blizzard are just the tip of the iceberg. Component makers like NVIDIA (NASDAQ:NVDA), Logitech, and Sony (NYSE:SNE) are all hard at work developing next generation gaming platforms, graphics, and accessories.

Media and intellectual property companies like Disney (NYSE:DIS) have long-standing licensing deals with game publishers to produce games based on their content. Disney even started up its own game development company, Disney Interactive Studios.

Another nice little tidbit from that PWC report: Sales of games designed for mobile devices are going to surge from $5.6 billion in 2007 to $13.5 billion. You can bet that device makers like Apple (NASDAQ:AAPL) and Nokia (NYSE:NOK) are going to get a piece of that action.

Grab your front row seat
Enter this week's Electronic Entertainment Expo (E3) -- the video game industry's premier annual showcase in Los Angeles, Calif. David Gardner and I will be there, getting the inside scoop from nearly 200 companies and thousands of gaming executives, designers, entrepreneurs, and experts.

We'll get a sneak peek at upcoming games from industry heavyweights like Activision and Microsoft, as well as those from smaller, emerging game makers like Bethesda Softworks, Perfect World, Take-Two Interactive (NASDAQ:TTWO), and THQ.

Want to find out which games David is most excited about? Want an insider's take on gaming-related stocks in your portfolio? Want to hear which companies we think will profit most from the gaming sector's extraordinary growth over the next decade and beyond?

A free trial of our Stock Advisor service gets you exclusive access to all our special reports from the E3, plus instant access to Motley Fool co-founders David and Tom Gardner's favorite stocks for new money right now. Hint: A gaming company tops their list this month! Here's more information.

Matthew Argersinger doesn't own any of the stocks mentioned. Apple, Activision Blizzard, Walt Disney, and NVIDIA are Motley Fool Stock Advisor recommendations. Take-Two Interactive Software is a Motley Fool Rule Breakers pick. Walt Disney and Nokia are Motley Fool Inside Value picks. Logitech International is a Motley Fool Hidden Gems selection. The Fool owns shares of Logitech. The Motley Fool has a full disclosure policy.