Hedge Funds’ Favorite Gaming Stocks amid Robust-Growing Video Gaming Industry

According to the Entertainment Software Association, the U.S. gaming industry generated revenues of $23.5 billion in 2015, an increase of 5% over 2014. Much of the revenue growth was driven by the strong software channel, as software sales jumped 7% year-over-year to $16.5 billion. Meanwhile, market research firm Newzoo recently revealed that the global gaming market would be worth $99.6 billion in 2016, up 8.4% relative to the previous year. Newzoo analysts also anticipate the mobile gaming industry to overtake the once-dominant PC and console gaming market. Precisely, the mobile gaming market is anticipated to generate revenues of $36.9 billion in 2016, a massive increase of 21.3% over 2015. That said, the video gaming industry continues to grow and is anticipated to grow at a robust pace in the years ahead. For that reason, Insider Monkey compiled a list of five most favorite gaming stocks among the hedge funds tracked by our team.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5. Glu Mobile Inc. (NASDAQ:GLUU)

– Investors with long positions as of March 31: 12

– Aggregate value of investors’ holdings as of March 31: $36.80 Million

A total of 12 hedge funds tracked by Insider Monkey were invested in Glu Mobile Inc. (NASDAQ:GLUU) at the end of the March quarter, down from 13 recorded at the end of the prior quarter. The overall value of those hedge funds’ holdings in Glu Mobile dropped to $36.80 million from $50.57 million quarter-over-quarter. The 12 “smart money” players amassed nearly 10% of the company’s outstanding shares. The mobile gaming app publisher has seen its market value plummet by 62% in the past 12 months, as top-line figures have dropped year-on-year for three consecutive quarters. Glu Mobile, which focuses on the action, celebrity, sports, and simulation gaming genres, has been having a hard time maintaining retention rates of users of its popular existing titles such as “Kim Kardashian: Hollywood”, “Deer Hunter 2014” and “Contract Killer: Sniper”. Revenue for the first quarter of the year dropped 21.5% year-on-year to $54.5 million. Joseph A. Jolson’s Harvest Capital Strategies had 4.35 million shares of Glu Mobile Inc. (NASDAQ:GLUU) in its portfolio at the end of the March quarter.

#4. Zynga Inc. (NASDAQ:ZNGA)

– Investors with long positions as of March 31: 17

– Aggregate value of investors’ holdings as of March 31: $318.44 Million

The hedge fund sentiment towards Zynga Inc. (NASDAQ:ZNGA) declined during the first three months of 2016, as the number of “hedgies” with stakes in the company dropped to 17 from 20 quarter-on-quarter. Similarly, the overall value of those funds’ stakes in Zynga decreased to $318.44 million from $509.61 million. Those 17 funds accumulated roughly 16% of the company’s outstanding shares. The social game developer, which generates revenue through the in-game sale of virtual items to players who can play for free, has seen its shares advance 23% in the past three months. While Zynga’s monthly active users for the first three months of 2016 dropped massively to 68 million from 100 million recorded in the same period of the prior year, the online game maker’s total revenue rose to $186.72 million from $183.29 million. The company’s ad sales for the quarter jumped 41% year-over-year to $49.66 million. Ricky Sandler’s Eminence Capital trimmed its stake in Zynga Inc. (NASDAQ:ZNGA) by 28% during the first quarter to 55.24 million shares.

#3. Take-Two Interactive Software Inc. (NASDAQ:TTWO)

– Investors with long positions as of March 31: 42

– Aggregate value of investors’ holdings as of March 31: $968.08 Million

Take-Two Interactive Software Inc. (NASDAQ:TTWO) was a hedge fund darling during the first quarter of the year, as the number of asset managers from our database with stakes in the company climbed to 42 from 36 quarter-on-quarter. The aggregate value of all those stakes grew to $968.08 million from $914.96 million during the first three months of the year. More importantly, the hedge funds stalked by Insider Monkey invested in the developer of interactive entertainment hoarded up around 30% of the company’s outstanding common stock. Soon after the video game publisher, which publishes products through its two labels: Rockstar Games and 2K, released a strong earnings report for the fourth quarter of fiscal 2016 that ended March 31, analysts at Jefferies cut the price target on the company to $45 from $48 while maintaining their ‘Buy’ rating on it. The price cut is said to reflect the fact that developer Rockstar Games is not set to release a “big, new game” until 2018. The company’s shares are 10% in the green year-to-date. David Einhorn’s Greenlight Capital owns 2.84 million shares of Take-Two Interactive Software Inc. (NASDAQ:TTWO) as of the end of March.

#2. Activision Blizzard Inc. (NASDAQ:ATVI)

– Investors with long positions as of March 31: 52

– Aggregate value of investors’ holdings as of March 31: $2.19 Billion

The number of money managers observed by Insider Monkey with long positions in Activision Blizzard Inc. (NASDAQ:ATVI) fell to 52 from 53 during the first quarter of the year, while the value of those positions plunged to $2.19 billion from a much higher figure of $3.01 billion. The 52 asset managers invested in Activision Blizzard stockpiled nearly 9% of the company’s outstanding shares. The developer and publisher of interactive entertainment has seen its shares advance 23% in the past three months and can go even higher, thanks to the apparent success of the company’s newest title Overwatch. The team-based first-person shooter, one of the most anticipated video game releases of the year, is believed to represent a major catalyst for Activision Blizzard’s revenue and earnings growth in the quarters and years ahead. “Overwatch looks like a hit”, claimed Jefferies analysts in a note to investors released earlier this week. Daniel S. Och’s OZ Management added a 4.81 million-share position in Activision Blizzard Inc. (NASDAQ:ATVI) to its equity portfolio during the first quarter.

#1. Electronic Arts Inc. (NASDAQ:EA)

– Investors with long positions as of March 31: 56

– Aggregate value of investors’ holdings as of March 31: $1.56 Billion

The smart money sentiment towards Electronic Arts Inc. (NASDAQ:EA) also fell slightly during the first three months of the year, as the number of money managers with stakes in EA declined to 56 from 57. What’s more, the overall value of those stakes plummeted to $1.56 billion from $2.26 billion registered at the end of the December quarter. The 56 “EA” investors hoarded up nearly 8% of the company’s outstanding common stock. The shares of the video game giant have touched a new all-time high earlier this month and are up by 9% so far in 2016. Electronic Arts, which generated GAAP net revenue of $4.40 billion in fiscal 2016 that ended March 31, plans to add $1 billion in incremental revenue over the next three to five years. The company anticipates GAAP net revenue of $4.75 billion for the current fiscal year that ends March 31, 2017. MKM Partners analysts believe the company could generate a bottom-line figure of $5 per share in fiscal 2020, while Wall Street analysts anticipate earnings per share of $3.58 for fiscal 2017. Philippe Laffont’s Coatue Management reported ownership of 5.90 million shares of Electronic Arts Inc. (NASDAQ:EA) in its latest 13F.

Disclosure: None