The stock market is higher by a respectable 12% as we head into the final month of the year. Video game stocks, meanwhile, have trounced that performance. After a successful launch of new consoles from Sony and Microsoft, along with some blockbuster video game releases, the industry is outgrowing the rest of the retailing world by a huge margin.
That growth has been reflected in booming share prices: The top three video game stocks returned an average of 58% this year, or 46 percentage points above the broader market.
Here's how these winners managed such stellar gains in 2014.
Activision Blizzard (NASDAQ:ATVI) -- up 22% year to date:
As the world's biggest publisher, Activision had the most to lose heading into the year. Its two biggest franchises, Call of Duty and World of Warcraft, were limping into their second decade. And even the new Skylanders brand looked vulnerable to attack from a Marvel-powered Disney game.
But Activision sailed through its challenges in 2014. This year's World of Warcraft expansion was a hit, outselling the 2012 installment and sending subscriber numbers back above 10 million players. With that success, investors can count on WoW to continue to kick in profits for years to come.
Meanwhile, Activision's latest Call of Duty chapter, Advanced Warfare, is off to a strong start. It earned better critical reviews, more sales, and higher engagement levels than its predecessor did in the week after release. Advanced Warfare also became the highest-selling digital launch in console history, which points to surging profits ahead for the game publisher.
Take-Two Interactive (NASDAQ:TTWO) -- up 61% year to date:
With no blockbuster hit to follow 2013's record launch of Grand Theft Auto V, investors were bracing for Take-Two to post a major year-over-year slowdown in 2014. Unfortunately, the game publisher delivered just that: Sales last quarter plummeted by 90% to $135 million as earnings fell to a loss of $0.44 per share from last year's $2.49 per share profit.
But Take-Two has also had its share of hits recently. Its NBA 2K15 title is the most successful in franchise history and a next-gen version of GTA V, as well as a new, highly anticipated property called Evolve, should boost results over the next few quarters. Wall Street is forecasting an 83% sales jump for Take-Two in the first quarter of 2015. With its relatively small market capitalization and lumpy release calendar, this publisher's shares tend to be very volatile. But that risk paid off to the upside for investors this year.
Electronic Arts (NASDAQ:EA) -- up 90% year to date:
Top prize goes to EA's stock, though, which has nearly doubled in price since the start of the year. EA is seeing huge interest in its sports games, led by the FIFA, NHL, and Madden franchises. Those titles helped revenue hit a second-quarter record of $990 million. Looking ahead, investors are expecting big things from the recently released Dragon Age: Inquisition and from the delayed Battlefield: Hardline game in the spring.
But the biggest story with EA has been around its success with boosting digital sales. Not only is this sales channel more profitable, but digital revenue tends to be more stable as it includes recurring charges for things like subscriptions, season passes, and downloadable content. EA's mobile sports games, for example, now average 40 million users in a given month, up 250% over the prior year.
The payoff from all that downloadable success is that EA's gross profit margin has jumped above 60% as compared to 45% five years ago.
That digital sales trend isn't unique to EA. Activision Blizzard and Take-Two are also seeing their profits rise as digital spending grows to a higher percentage of sales. As long as these publishers can capitalize on that trend while cranking out hit titles, their stocks should carry this year's momentum into 2015.