Video Game Stocks Continue To Score Points

If we asked what two S&P 500 tech stocks had posted the best performance this year through mid-October, it wouldn’t be a stretch to think the savvy among you could come up with Netflix, Inc. NFLX and Amazon.com, Inc. AMZN.

But would you care to guess at Nos. 3 and 4?

As contributor Jon Markman recently pointed out in a piece for Forbes, the intriguing answer is two video game companies: Activision Blizzard, Inc. ATVI, which is up nearly 70% in 2015, and Electronic Arts Inc. EA, which has increased more than 52%.

Other video game investments have climbed, too: The Online Gaming World motif (where shares of ATVI and EA have a 45.1% weight) has risen 57.7% in the past 12 months. In that same time, the S&P 500 has gained 7.8%.

Over the past month, Online Gaming World has increased 8.5%; the S&P 500 is up 2.2%.

As Markman noted, the reason this market may not have come to mind is that investors may not appreciate its sheer size.

Tech research firm Gartner sees the worldwide videogame market of console, online, mobile and PC products at $111 billion by 2016 and $128 billion in 2017, Markman wrote. Compare that to the film industry, which had $88 billion in worldwide revenue in 2015, according to PwC.

Another sign of video games’ massive appeal: Activision is boosting its investment in the “eSports” popularity surrounding its mega-hit Call of Duty game, each version of which regularly earns $1 billion at retail.

As Activision has figured out, releasing the game itself is just one piece of the revenue component — there’s also attempting to improve engagement by fostering appeal in worldwide competition, both for in-game players and those wanting to watch the action.

The company is overseeing a new Call of Duty World League, which includes separate professional (Pro) and amateur (Challenge) divisions that will feed into the Call of Duty Championship. The new league kicks off in January 2016 with Call of Duty: Black Ops 3 and runs through the fall championship. The game publisher has also expanded its prize pool from $1 million annually to over $3 million beginning in 2016.

As a Barrons.com article pointed out earlier this year, online games are proliferating due to the recent explosive growth of mobile devices — and mobile gaming shows no sign of slowing. That’s especially true in China, where only half the population has Internet access, but among those who do, three out of five “netizens” consider themselves gamers.

In 2014, Chinese online gaming revenues jumped nearly 35% year-over-year to $18.5 billion. Of that, 24% came from the fast-growing mobile segment, up from 13.5% in 2013. By 2016, market research firm NewZoo thinks China’s mobile game industry will surpass even that of the US, Barrons.com said.

One key Chinese player is NetEase Inc. NTES, which has an 18.4% weighting in the Online Gaming World motif. NetEase’s online game services account for about 80% of its total revenue – up from less than 20% some 15 years ago. Just two years ago, the company brought its first mobile game to market, and today mobile is among its faster-growing and most promising segments, driving 20% of the online gaming business, up from just 9% mid-2014.

As Barrons.com described it, NetEase has accomplished its growth by developing a loyal following of hard-core gamers with its MMORPGs – “massively multi-player online role-playing games” – including its flagship game Fantasy Westward Journey. While these games take more time to develop, they also have a longer shelf life and lure gamers who play for hours at a time and pay to advance to the next level.

The mobile version of Fantasy Westward Journey, a 10-year-old game, vaulted to the No. 1 spot in Chinese iOS app stores within hours of its March 26 launch, and, more importantly, hadn’t relinquished that top seat three months later.

As the holidays approach, new titles may help sustain the rally in video game stocks once initial sales results filter through. According to a recent Nielsen survey, Activison’s upcoming Black Ops 3 is the most anticipated video game this season.4

A sales outperformance there could continue the solid returns for long-term video-game investors.