Video games have always been one of the top leisure time activities for people, and with the advent of smartphones and tablets, the time spent on these activities has increased significantly over the past few years. The videogame industry stood at an estimated $63 billion as per an international development group’s estimate. The industry is highly fragmented, with a few large players and a number of small players within the industry, both private and public. The industry has experienced a lot of consolidation over the past few years, with some of the largest companies involved in business acquisition or asset acquisition in order to enhance their portfolios of products and enter markets for various platforms.
Within the gaming industry there are three major publicly listed US companies that have had a successful history in creating some of the most popular and award-winning games in the past. Electronic Arts Inc. (NASDAQ:EA), Activision Blizzard, Inc. (NASDAQ:ATVI) and Take-Two Interactive Software, Inc. (NASDAQ:TTWO) are the publishers of some of the best-known household names in the gaming industry such as Need for Speed, FIFA, Call of Duty, World of Warcraft, Grand theft Auto, and NBA 2K. All the companies have historically been focused on console gaming, but have adapted, and through acquisitions and capital expenditures have also established themselves in the mobile gaming market.
Performance
Activision Blizzard, Inc. (NASDAQ:ATVI) is one of the oldest developers and publishers of interactive software products and content. The company has achieved a revenue growth of more than 10.88% per annum over the last five years, with the highest growth coming in 2008, more than 91% due to acquisition and mergers in that year.
Excluding the results of 2008, the company has achieved a compound annual growth rate, or CAGR, in revenues of around 13.77% over the past 4 years. The operating margin of the company has increased from 16.5% in 2008 to 29.9% in 2012. The major contributor to the improved profitability of the company is the improving gross margin due to favorable pricing in the market, better cost control, and an increasing amount of revenues coming through the digital channels, which have higher margins.
Electronic Arts Inc. (NASDAQ:EA) is also one of the oldest publishers and distributors of game software content and services. It is one of the leading developers of games in the racing and sports category. The company’s revenues have been quite volatile over the years, increasing first in 2008 and then dropping in two consecutive years, and then increasing in 2011 again before dropping in the most recent fiscal year. The company has also experienced losses from the period spanning from 2008 to 2011, as the company incurred restructuring charges and acquisition-related charges.
Post-restructuring the company has been able achieve an operating profit, although it was still not at par with its historic profits due to considerably higher research and development costs. The company spends the most in R&D as a percentage of revenue, and because of this along with the recent acquisitions and restructuring, I expect the company to improve its margin in the future.
The smallest of the lot, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) has developed some of the most popular games in recent history, including the most popular game series of all time, Grand Theft Auto, as per Metacritic reviews. The company has a substantial presence on almost all gaming platforms. It has achieved a growth in revenues of around 4.33% per annum over the past five years. The slow growth in revenues can be attributable to the divesture of SYNNEX in fiscal year 2012, which resulted in a drop in revenue by more than 27% in that year.
The company has operated at a lower margin than its peers and has been very volatile over the years. The company is growth oriented and has continuously invested heavily in research & development and in acquisitions, and as a result has launched many new franchises and has received a phenomenal response from the market as per Metacritic data. In the future, I believe the company will see a rapid improvement in its margins as the company will generate high revenues growth due to its newly launched products.
The industry scenario
The global gaming industry is expected to grow at a CAGR of 6.7%, reaching $86.1 billion by the end of 2016. Out of the various platforms, the fastest growth is expected in tablets (57.6%) followed by smartphones (18.8%) and consoles (3.5%). Massively multiplayer online games, or MMOs, are expected to grow at an annual rate of around 10.4% through to 2016.
Among the peers selected, Take-Two Interactive Software, Inc. (NASDAQ:TTWO), although small in size, has already released some of the most popular games on the console and iOS platform in 2013. Take-Two Interactive Software, Inc. (NASDAQ:TTWO) and Electronic Arts Inc. (NASDAQ:EA) compete in the sports and racing category and have a strong fan base for various titles; however, within these specific categories Electronic Arts Inc. (NASDAQ:EA) is dominant due to its long history and a strong fan base.
Activision Blizzard, Inc. (NASDAQ:ATVI), on the other hand, has historically dominated the MMO category with its World of Warcraft title. With a huge fan base, it is expected that this game title will continue to dominate the MMO segment for sometime in the future.
The upcoming titles of all the companies are targeted towards the specific market segments in which they have established presence. Electronic Arts Inc. (NASDAQ:EA) is looking to cash in on its sequels and is attempting to make some headway into the MMO category. Activision Blizzard, Inc. (NASDAQ:ATVI) is expected to release sequels and continue to strengthen its position in the MMO category. Meanwhile, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is preparing several launches to establish itself in the tablet and smartphone market while, in the MMO category, the company is currently focusing on the Asian market with the launch of various titles on the Tencent platform.
Conclusion
The high growth in the gaming industry means that the companies involved in the publishing of games have the potential to generate high returns in the future. Out of the three peers selected, I believe that all of them will show improved performance in the coming years.
However, in my opinion, two of the lot selected will show extraordinary returns in the future. Activision Blizzard, Inc. (NASDAQ:ATVI) is a prime investment option for value investors due to the expected growth in earnings for the company, coming in particular from the MMO category. While out of the remaining two companies I believe that Take-Two Interactive will be able to perform better than Electronic Arts Inc. (NASDAQ:EA), primarily due to the success that the company has achieved on the fast-growing tablet and smartphone platforms. Thus, I would recommend Activision Blizzard, Inc. (NASDAQ:ATVI) as a Buy for value investors and Take-Two Interactive Software, Inc. (NASDAQ:TTWO) as a Buy for growth investors, while I have a neutral outlook for Electronic Arts.
Hussain Asghar has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. Hussain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Multiplayer and Mobile Games to Dominate the Industry originally appeared on Fool.com is written by Hussain Asghar.
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