We’ve come a long way since Atari’s Pong; however, the end of video-gaming seems nowhere near. Since video games became publicly widespread in the early 70’s, several companies have been competing to offer the best gaming experience.
Over the last few years, some game developers have stood out among the crowd for the quality of their games, catching larger portions of the public. This has been the case of Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts Inc. (NASDAQ:EA) and Changyou.Com Ltd (ADR) (NASDAQ:CYOU). Let’s take a closer look at them and try decide if they stand as good investment opportunities as well.
Activision Blizzard: Only online games
Activision Blizzard, Inc. (NASDAQ:ATVI) is a worldwide leading pure-play online and console game developer. Its wide product portfolio includes blockbusters like World of Warcraft, or WoW, Guitar Hero, Call of Duty, and Tony Hawk, among many others. Usually on the top of game sales charts, this is a firm to watch.
Its expertise at making games has been reflected on the extreme loyalty of its customer base and the considerable amount of franchise royalties it receives from game distributors, like NetEase, around the world. Its WoW franchise has been particularly popular, massively played for over 9 years now. Monthly prepaid subscription fees make WoW a vast revenue source and, although the number of subscribers has been dropping lately, its contribution to cash flow and margin generation will remain significant.
The company is now trying to replicate the success of its WoW franchise model for other games. Given its track record, I expect Activision Blizzard, Inc. (NASDAQ:ATVI) to continue to diversify revenue sources, maintaining its industry leading margins (including an operating margin of over 30%, about 10 times the industry average) and returns.
Emerging economies provide outstanding growth opportunities for Activision Blizzard, Inc. (NASDAQ:ATVI). As the middle class grows in these countries, disposable income and time available for video-games increase too. The company will benefit not only from its strong brand names and blockbuster games, but also from a strategic partnership with Tencent Holdings, China’s largest Internet gaming company, which will help the firm penetrate the $8 billion online gaming market in this country.
So, trading at 13 times its earnings, at a 40% discount to the industry average, I would buy this stock for the long-term (and receive a 1.33% dividend yield).
Electronic Arts: Offline & online games
Electronic Arts Inc. (NASDAQ:EA), or EA, is another game developing and distributing company that operates in both the offline and online gaming segments. Its wide product portfolio includes blockbuster franchises like FIFA, Need for Speed, Battlefield, Medal of Honor and The Sims to name a few. Most of its revenue is derived from disk-based video game sales and, in a lesser degree, from subscription fees, micro-transactions and advertising.