Going forward, the firm should benefit from lowering its production costs and difficulty by leveraging its new development engines. Moreover, renewed contracts with several of its major sporting league partners assure continuity for some of EA’s most valuable franchises.
However, it’s Electronic Arts Inc. (NASDAQ:EA)’s mobile and online games that represent its future. Its Origin platform positions the firm in an advantaged place to benefit from the rapid expansion of online gaming, while its “freemium” model for the mobile segment could deliver plenty of upside on the back of its games’ quality. These segments are expected to drive growth and contribute to margin expansion over the next few years.
While forecasts are somewhat mixed in relation to the company’s EPS growth going forward, its stock valuation at 74 times its earnings, over 3 times the industry average, reflects plenty of optimism. You will have to pay a premium if you want to hold this fairly moated, liquid company in your long-term portfolio.
Changyou.com: Chinese market
Changyou.Com Ltd (ADR) (NASDAQ:CYOU) develops online games for the Chinese market. Unlike the aforementioned companies, Changyou.Com Ltd (ADR) (NASDAQ:CYOU) is not very well known in the West. For this reason, its stock trades at only 5.5 times its earnings, a 75% discount to the industry 22 times average. However, its growth prospects look quite promising as the online gaming market quickly expands in China.
With its Tian Long Ba Bu, or TLBB, game as its biggest revenue contributor, the firm has been focusing on expanding its product offering beyond it through in-house development coupled with acquisitions and licensing.
Game offering diversification and the growth of the middle-class in China are two of the main growth catalysts for the company. Better monetization models and strategies that entice gamers to spend more money are also expected to drive growth in the years ahead. Furthermore, the wide and loyal user base created by TLBB not only allows the firm to “gain more insights into gamers’ behavior and spending patterns, which should help it develop more popular and profitable games” (Morningstar), but also provides considerable cross-selling capabilities.
Finally, the company recently bought out minority shareholders in 7Road, a majority-owned subsidiary of Changyou.Com Ltd (ADR) (NASDAQ:CYOU). This will allow the firm to fully control the game pipeline, gaining an edge over competitors in the web-gaming space while consolidating its image as a firm with more than one battle horse.
Bottom line
Although all three of the aforementioned gaming companies provide plenty of upside potential, Changyou.Com Ltd (ADR) (NASDAQ:CYOU) and, especially, Activision Blizzard, Inc. (NASDAQ:ATVI) offer better combinations of decent valuations and strong growth projections than Electronic Arts Inc. (NASDAQ:EA). I’d recommend adding these stocks to your long-term portfolio, and preparing to enjoy steady and sustainable evolution in the stock prices and earnings.
The article Gaming These Gaming Stocks originally appeared on Fool.com.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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