Electronic Gaming Is Still Red Hot

By Aaron Levitt | September 02, 2014 AAA

With the economy finally beginning to look like it's moving forward, consumers have once again resumed spending some hefty dollars on discretionary items and leisure activities. Funds like the PowerShares Dynamic Leisure & Entertainment ETF (NYSE:PEJ) have surged to new highs over the last few months as a variety of discretionary subsectors have regained their mojo.

Leading the pack have been video and computer gaming.

Driven by recent hardware upgrades and blockbuster new titles, the sector remains a hot bed of activity. And perhaps more importantly, it’s expected to grow even further in the years ahead as several bullish catalysts propel it forward. For investors, betting on the growing industry could be one of the brightest spots for their portfolios.

Getting A Much Needed 1-Up

While the recession took much of the “oomph” out of the video game industry's sails, it’s since come back with a vengeance as consumers have once again begun buying the products in spades. The compound annual growth rate (CAGR) of video and electronic games has outpaced other forms of entertainment such as movies, music and books by a pretty substantial margin. Overall, video games have grown by a CAGR of 7% over the last five years. That contrasts with books'- including e-books'- negative 6% growth rate.

And that growth rate is still set to explode higher.

According to recent forecasts from consultants Strategic Analytics, global video game sales are expected to top $62 billion this year, while sales of the hardware and video game consoles are forecast to reach 32 million units sold worldwide. A 14% jump versus 2013’s numbers. By 2017, analysts predict that gaming will be a $100 billion industry.

The reason for this jump is two-fold.

First, the sector is in the middle of a hardware refresh cycle. New next-gen consoles have hit the markets, replacing older and outdated devices. Users have stepped-up to purchase these machines as well as their software in spades. Both Tokyo’s Sony (NYSE:SNE) and Redmond, Wash.-based Microsoft​'s (Nasdaq:MSFT) new PlayStation 4 and Xbox One consoles respectively have sold impressive numbers since being launched in November. As more users trade-up to the new systems, the sector's growth will continue.

Secondly, mobile gaming is exploding and currently represents 40% of all apps downloaded to mobile devices. This makes video games the most popular category of app. People are also spending plenty of time playing those games. Video games accounted for 32% of all mobile app use on smartphones and 67% of tablet use last year. Overall, analysts believe that mobile gaming alone could grow to become a $60 billion market by 2017.

Powering Up A Portfolio

Given just how much time and money is being spent on video games, investors looking for a consumer discretionary play may want to give the sector a go. Popular leisure funds like the Consumer Discretionary Select Sector SPDR (NYSE:XLY) do include some exposure to video games. However, individual picks are the way to go in this market. Here are a few of the top ones.

Fresh off its IPO, London's King Digital Entertainment PLC (Nasdaq:KING) might be a value for patient investors looking to cash in on mobile gaming. The gaming company sank nearly 15% on its opening trading day as many analysts compared it to fallen San Francisco-based gaming superstar Zynga (Nasdaq:ZNGA). However, unlike Zynga, KING is a money making machine. More than 90 million people play its Candy Crush Saga each day and the firm is profitable. King managed to generate revenues of $1.88 billion in 2013.

When it comes to traditional game makers, both Santa Monica, Calif.-based Activision Blizzard (Nasdaq:ATVI) and Redwood City, Calif.'s Electronic Arts (NYSE:EA) are the only two firms that really matter. Both feature vast game franchises that have fanatical fans. These include EA’s various sports games and ATVI’s "World of Warcraft”. These mega-hits have helped the firms produce big profits for their shareholders over the years. However, the duo isn’t resting on their laurels. Both have begun adapting new digital revenue streams that include time-based subscription services and downloadable game-related content. That should help future earnings going forward. It also could be big trouble for traditional video retailers like Grapevine, Texas-based GameStop (NYSE:GME).

The Bottom Line

When it comes to spending our leisure dollars, more and more of them are going towards video games and electronic entertainment. And with that fact in tow, investors may want bet on the discretionary sector. The previous picks- along with New York's Take-Two Interactive Software Inc. (Nasdaq:TTWO) –make ideal plays on the sector.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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