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Winning Video Game Makers: A Third-Person View

By Dan Newman - Mar 19, 2014 at 10:18AM

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Confused about which gaming stocks to look at? Check out these recent winners.

If you take in the hype, the players in the video game industry either have infinite lives or just one mistake left to a 'game over'. In this industry, companies take turns in first, and those that seem to have a grip on the latest trend win investor interest. It's an industry where short-termism is rampant, from console to console and title to title.

And because of this short-term thinking, it's an industry that can reward long-term investors who play against such hype. To help get you started in identifying such opportunities, here's an overview of each company that is plugged into gaming and winning. Check out the companion article for those companies that seem to be down on their luck. 

The hyped
Mobile gaming is the buzzword needed to win hype in today's market.

Soon-to-IPO King Entertainment is valued at $7.6 billion with its hit mobile game Candy Crush. The company made $568 million last year in profit, and at the upper end of its IPO range at $24 per share it would have a P/E ratio around 13. While this seems to be a value for King's quick profit growth, investors learned their lesson from Zynga ( ZNGA -4.19% ), which was the last hyped company to IPO based around the hyped concept of social gaming.

King must produce another hit title, as these mobile games are inherently quick to lose players. So, while a company that consistently spun off $500 million in profits might have a higher P/E ratio, the profit inconsistency seems to be priced into King's expected float.

Another mobile winner, Glu Mobile ( GLUU ) stock is up nearly 150% over the past 6 months. Glu Mobile has the titles Deer Hunter, Frontline Commando, and recently added Robocop. Last quarter the company posted a profit, albeit adjusted and not GAAP, for the first time since its founding, resulting in a 28% bounce for the stock since it blew analyst estimates of breakeven or loss away. That result was driven by a new release of Deer Hunter, which, as Fool Adrian Campos explains, represented over 50% of Glu's revenue.

If the IPO and uncertainty of King Entertainment's youth scares you, Glu's been plodding along since 2001 -- although at a loss at least since 2005. And for 2014, Glu expects to barely be profitable, with earnings between breakeven and $0.02 per share. Even with those lackluster numbers, experience and maturity lend confidence to Glu over other mobile developers.

Activision Blizzard (NASDAQ: ATVI) stock has rallied 45% over the past year, with its strong stock of titles including World of WarcraftCall of Duty, and Starcraft. It released a mobile version of Call of Duty last September, which sells for $6.99, and Cabela's Big Game Hunter in December, which is free with in-app purchases. Mobile revenue, lumped in with merchandise sales in its financial statements, makes up 14% of its total revenue. Even with this sizable chunk, finding future growth avenues through new free-to-play titles like Hearthstone will be key, as the company expects earnings per share to fall to $0.76 for fiscal 2014, compared with $0.95 in 2013.

Joining the winners are Take-Two Interactive ( TTWO -0.04% ) and Electronic Arts ( EA -0.86% ), with their stocks up 40% and 60% over the past year respectively. Take-Two's rise is for very different reasons than EA's, as Take-Two has so far tip-toed around mobile gaming with simple releases of past hits like Grand Theft Auto and Sid Meier's Civilization. And so, in the last quarter when the fifth installment of Grand Theft Auto was released, 97% of revenue came from console sales and 3% from PC sales, with an insignificant amount from mobile.

EA, on the other hand, has numerous mobile titles including The Simpsons: Tapped OutPlants vs. ZombiesMonopoly, and The Sims. In the last quarter, mobile and handheld revenue increased 26% year-over-year, making up roughly 15% of total revenue for the quarter -- similar to the role it played at Activision.

A new high score
These companies are testing new highs as enthusiasm around them peaks. They could very well keep up their winning streaks, or fall flat as revenue dries up from recently released blockbusters. With these companies and their stocks, which have been on a tear recently, be more cautious with valuing an upside as it seems a heady optimism may be priced-in.

For gaming companies that are less of a stretch for potential upside, check out the recent losers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
EA
$124.88 (-0.86%) $-1.09
Glu Mobile Stock Quote
Glu Mobile
GLUU
Take-Two Interactive Software, Inc. Stock Quote
Take-Two Interactive Software, Inc.
TTWO
$169.60 (-0.04%) $0.06
Zynga Inc. Stock Quote
Zynga Inc.
ZNGA
$6.17 (-4.19%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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