Publishers of video games are finding creative new ways to bolster their profits, including expansion packs, in-game purchases of items and in-game advertising, according to the Wall Street Journal. Several leading players in the industry now derive most of their revenues from higher-margin digital distribution channels, such as Electronic Arts Inc. (EA), Activision Blizzard Inc. (ATVI) and Take-Two Interactive Software Inc. (TTWO). Against a backdrop of strong revenue growth, these stocks have performed like superheroes since the start of May 2016: through the close on Wednesday, shares in these companies are up 74% ($62.08 to $108.16), 64% ($34.11 to $55.99) and 100% ($34.30 to $68.68), respectively.
The downside is that these three industry leaders now are trading at their highest multiples relative to forward earnings in five years, making further gains more difficult to achieve, and increasing the odds of increased volatility in their share prices, the Journal adds. On the other hand, while these multiples for the three companies range between 23 and 27, the forward earnings multiple on the Nasdaq Composite Index is about 22.4, not that much lower, the Journal observes. (For more, see also: This ETF Suggests Video Gaming Companies Are Overvalued.)
Adding on Revenue
Expansion packs, also called expansion sets or supplements, add new content, characters or features to existing games. According to The Artifice, an online magazine devoted to various art forms including video games, whereas a price of about $59.99 is typical for many games, expansion packs often cost in the range of $5 to $25 each.
Items are virtual goods used by characters in video games, to enhance the action. The website Gamer Headlines has offered a list of ten items that would be most useful in real life, if they really could exist. Meanwhile, in-game purchases of items are additional money spinners for game producers, as described by Techopedia. A brief perusal of gamer discussion boards indicates that hard-core gamers often spend much more on items than on the games themselves. Think razors and razor blades. Activision Blizzard has posted strong revenues recently despite no big new game releases, largely due to a steady stream of in-game purchases, Barron's reports.
In-game advertising is a growing source of revenue for game producers, and comes in three major varieties, according to RapidFire Inc. Static in-game advertising typically involves product placement. Dynamic in-game advertising is employed by ad networks in much the same way as they deliver real-time ads on websites, with messages varying over time, by geographic region, etc. Advergames are designed with the sole purpose of promoting a product or service.
Waiting for New Hits
While these various schemes for milking additional revenues from older games are proving their worth, retaining a leadership position in the gaming world still requires the rolling out of big new hits. However, as the Journal notes, the production of new hits is a difficult business, with slippage in delivery dates and the real danger that an lengthy, expensive development process may generate a flop. For example, Take-Two won't say when a new version of its popular "Grand Theft Auto" will appear, the Journal says. The current edition was released in 2013. Competitive gaming and virtual reality, meanwhile, are new frontiers for the video game business that promise future opportunities, the Journal suggests.
Another investment play in the gaming market is to consider the makers of key components for gaming consoles, such as microprocessor chips. For example, Advanced Micro Devices Inc. (AMD) may be stealing a march on Intel Corp. (INTC) with its Ryzen chip and the desktop CPU built on it that offer "excellent value for the money," according to a review in Ars Technica.