Video Games, Electronic Arts Inc. (EA), Zynga Inc (ZNGA): An Uninvestable Industry?

What about the companies that didn’t make it?

Despite their troubles, Electronic Arts Inc. (NASDAQ:EA) and Zynga Inc (NASDAQ:ZNGA) continue to survive. The same can’t be said for the numerous other video game makers that have gone bust.

THQ declared bankruptcy at the end of January, losing shareholders a lot of capital in the process. Shares of THQ traded above $20 early in 2008, but are virtually worthless five years later.

38 Studios was never publicly traded, but the company’s bankruptcy in 2012 drew a lot of media attention after Rhode Island taxpayers were left partially holding the bag (the state’s economic development corporation had given the company a $75 million loan).

Like THQ, Midway Games stuck its shareholders with a lot of worthless paper, declaring bankruptcy in 2009. Known for its Mortal Kombat series of games, Midway shares had been trading around $21 in early 2005.

Activision has been an exception

Activision-Blizzard is a lone exception. Despite underperforming the S&P 500 by a wide margin, Activision shares are up about 7% in the last five years. In the last six months, shares are up over 20%.

Unlike its less successful rivals, Activision has built its corporate strategy on continuously monetizing a core base of strong properties. For example, the company releases a new Call of Duty game every fall, netting itself $60 per player despite only minor updates to the game. The aforementioned World of Warcraft brings in millions in subscription revenue, while Diablo III has an in-game auction house that generates royalties for the company.

But can Activision continue this success over the long haul? Thus far, the company has done little to address growing trends like mobile gaming. Only time will tell, but Activision, too, could join the list of has-been game makers.

Should investors avoid video game stocks?

Although the industry continues to grow, video game makers do not seem to be good long-term bets. That isn’t to say that investors can’t make money in these names, but only that buying and holding these stocks for long periods of time appears unwise.

Investors in video game companies should keep a close eye on their investments. If a studio’s major game looks like a failure, consider getting out before it’s too late.

The article Video Games: An Uninvestable Industry? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.

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