2014 was a great year for video game stocks, thanks to some blockbuster releases and the surging popularity of new gaming consoles. But the outlook for many companies in the industry looks even better in the year ahead: A huge installed base of next-generation consoles points to record software sales. And publishers' profit margins should spike higher as gamers spend more on digital content purchases and subscriptions.
With those positive trends in mind, let's look at three video game stocks that could have a particularly strong 2015.
Activision Blizzard (ATVI +0.00%)
Image source: Activision.
Despite the near-record results Activision will post in 2014, the world's biggest video game publisher isn't resting on its laurels. Instead, management is planning to shake up its content portfolio in a big way. Sure, the strategy relies on milking established franchises like Call of Duty and World of Warcraft. But it also involves expanding into new geographies, new platforms, and new business models.
For Activision that means tackling emerging markets with its Call of Duty Online game, which will launch in China in the first quarter. The publisher also has some big new contenders in the free-to-play business model, including Heroes of the Storm and another expansion for its Hearthstone digital card game.
Meanwhile, Activision should continue to collect subscription revenue from World of Warcraft thanks to this past quarter's hugely successful game expansion. And the latest Call of Duty installment, Advanced Warfare, has the potential to push profitability to new highs in 2015.
Electronic Arts (NASDAQ: EA)
Image source: EA.
Electronic Arts is on track to deliver record profitability, cash flow, and earnings in its fiscal year 2015, which are three good reasons why the stock is pushing new highs. Established sports franchises like FIFA, Madden, and NHL are doing the heavy lifting right now. But EA's portfolio also includes plenty of non-sports titles. From Dragon Age: Inquisition and the Sims, which already launched, to a new Battlefield installment in March, EA has a publishing roster that is at least as diverse as Activision's.
However, a key difference between the two companies has been EA's more frequent struggles with game launches. EA caused a firestorm of controversy with its SimCity release in 2013 and had to apologize to gamers when servers crashed. And this year's release calendar got a major rewrite when EA had to push its Battlefield: Hardline game out of the holiday season. Assuming that the publisher can avoid snafus like that in 2015, investors should be rewarded with more gains in stock.
GameStop (GME 0.48%)
Meanwhile, investors looking for an underdog in the industry can consider GameStop. Yes, the specialty retailer sounds like an odd choice for this list given that the digital purchasing trend that's helping publishers isn't exactly good news for GameStop.
Still, the retailer dominates video game selling right now with close to 50% of the market for next-generation software. Rivals just can't compete with its buy-sell-trade model that customers embrace for a simple reason: It lowers the effective price of games and hardware. That's an important competitive advantage when you're talking about a hobby that can easily stretch into the hundreds of dollars in annual costs for customers.
Its leading market position should help GameStop continue to post healthy sales and profit gains in 2015 while management engineers an expansion into new markets like consumer electronics and wireless services. Meanwhile, the stock is the cheapest of the bunch, lower by 20% this year. That's a reflection of Wall Street's dour outlook for the retailer in a world that's eventually going digital. But GameStop has bitten bears before, and, valued at just 11 times earnings, it has a decent shot at doing so again in 2015.
