Activision Blizzard, Inc. and Electronic Arts Inc. (EA Quick QuoteEA - Free Report) are two of the biggest names in the video game industry today. Both the stocks have performed well so far in the year and have significant scope for growth in the future. This keeps investors’ interest alive.

Let’s have a look at a few key metrics and important developments that make these stocks worthy of a place in your investment portfolio.

Activision Blizzard

Activision’s better-than-expected second-quarter 2016 results were driven by the stupendous success of Overwatch (over 15 million users since its release on May 24, 2016), increasing digital revenues and strength in the Call of Duty title. Moreover, in the trailing four quarters, Activision has an average positive surprise of 33.5% while its shares have jumped nearly 5.5% year to date.

Activision has an enviable IP which includes franchises like Destiny, StarCraft, World of Warcraft, Heroes of the Storm and Call of Duty.  These are widely popular and should continue to contribute to the bottom line.

Activision has been striving to become a broad-based entertainment company. The acquisition of Candy Crush maker King Digital Entertainment (it had announced the acquisition in Nov 2015 for $5.9 billion) was a ploy to enter the lucrative mobile games market where so far Activision has had limited presence. As per an Apr 2016 report, research from Newzoo estimates the global games market to grow 6.6% to $118.6 billion in 2019 of which $52.5 billion will be coming from mobile games. 

Moreover, King Digital has added a large female user base to Activision’s hardcore male dominated gamer base. The company’s gamer base stands close to nearly half a billion, more than Twitter and on par with Instagram’s user base.

Last year, the company announced the launch of a film and television unit, Activision Blizzard Studios. As per Activision, the studio is “a synergistic complement” to its core business. It is spearheaded by Hollywood producer Stacey Sher and a former Walt Disney executive Nick Van Dyk. In Jun 2016, Activision launched its first movie Warcraft based on its super hit video franchise World of Warcraft. However, the movie despite terrible reviews and a bad show at the domestic box office managed to mint good money in the overseas territories especially China. 

The company is also increasing its presence in the lucrative e-sports market. Earlier this month, the company hosted a 3-dayCall of Duty World League event in Orlando with $100,000 prize money. As per a Deloitte report, revenues from e-sports are expected to grow 25% year over year to $500 million in 2016 with a 150 million strong viewership. A Newzoo report estimates global e-sports revenues will grow to $1 billion by 2019.

Activision’s Call of Duty: Infinite Warfare is scheduled to release on Nov 4, 2016, just ahead of the holiday season. This should bode well for the company’s revenues as Call of Duty has a massive fan following. Apart from that, it will release an expansion pack for Destiny in Sep 2016 and will launch the full game sequel in 2017. Moreover, Activision will release the much awaited expansion pack for World of Warcraft, Legion, on Aug 30, 2016. No wonder, the company raised its guidance for the fiscal year on the last earnings call.

Given the impressive pipeline, estimates for the current year have gone up from $1.69 to $1.86 in the last 30 days. With a Zacks Rank #2 (Buy) and a long-term EPS growth rate of 19.8%, Activision remains a stock to watch out for in the video game space.

However, the company’s high debt levels are an area of concern. As of Jun 30, 2016, Activision had a debt of $5 billion as against $2.27 billion in cash and cash equivalents. 

Electronic Arts

Strength in digital revenues and titles like FIFA Ultimate Team, and mobile games like Star Wars: Galaxy of Heroes drove Electronic Arts’ better-than-expected first quarter fiscal 2017 results. In fact, the company has beaten the Zacks Consensus Estimate in the trailing four quarters by an average of 32.22%. Shares have jumped nearly 17.3% so far in the year.

EA has a roster of well-known franchises, Battlefield, Titanfall, Star Wars and EA SPORTS titles, which will continue to fuel top-line growth.  Last year, Star Wars Battlefront was a blockbuster with over 14 million copies sold. Again, Battlefront has room to grow, given the fact that Walt Disney has a very ambitious plan to revive the Star Wars franchise. Disney has already announced two more sequels after Force Awakens and three standalone movies to be released in the next few years. Fully aware of this, Electronic Arts has already announced sequels to Battlefront.

Apart from that, EA has a strong pipeline of new launches that will continue to drive its revenues. For fiscal 2017, the company has big game launches like NHL 17, and FIFA 17; Battlefield 1(Oct 21), a new Titanfall game (Oct 28) and Mass Effect Andromeda scheduled for the back half of the fiscal.

We expect Electronic Arts digital business to continue to grow in fiscal 2017 and beyond, primarily on the back of a strong mobile business. As consumers are increasingly spending more on smartphones and portable devices (such as iPad) as against traditional devices for playing online games, mobile games have become one of the fastest growing segments in the video game market.  It has launched mobile version of some its popular franchises like Madden NFL and Star Wars: Galaxy of Heroes.

Though the company hasn’t snapped up a big name like King Digital, it acquired PopCap game in 2011 for $1.3 billion that has given it the rights of mobile games like Bejeweled and Plants Vs Zombies.

Plus, Electronic Arts too, has been dabbling into e-sports. Like Activision, the company has set up its own e-sports division and is funding competitive tournaments with alluring prize money.

With so many things going in its favor, estimates for the current year have gone up from $3.09 to $3.12 for fiscal 2017 in the last 30 days. Moreover, with a Zacks Rank #2 (Buy) and a long-term EPS growth rate of 16.1%, EA remains an attractive investment opportunity.

Hefty Valuations a Deterrent?

Many will argue that hefty valuations make these stocks a risky bet. Activision and Electronic Arts are trading at a forward P/E valuation of 23.4x and 26.2x, respectively compared with the industry average of 21.1x. That is not necessarily the case since hefty valuations and increasing share prices do not always imply that the stock does not have much upside potential left.

Bottom Line

These two stocks have grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections. They also have a solid pipeline that should lead to continued growth. Keeping this in mind, we believe that investing in either would yield strong returns for your portfolio.

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