Fun & Games for Serious Growth & Income
June 18, 2020
Millions of folks trapped at home has led to surging demand for online content.
In March, Comscore (SCOR) reported that electronic gaming on consoles (using a proprietary hardware device like Microsoft’s Xbox) surged 48%.
Demand for gaming over all devices was up 19% in its universe of surveyed households through April.
Honestly, I don’t play many electronic games. I used to have a golf game on my smartphone. And I used to play chess online, although I prefer to play in person.
And I’ve tried gaming consoles for golf and found them wanting. I prefer to wait it out until I can be on a course with family or close friends at a distance.
However, some of the folks on my team at Profitable Investing are gaming enthusiasts. And I’ve continued to discuss with them the noted rise in gaming.
In addition, my teammates report that they know friends and family who are either increasing their gaming or are returning to play games.
I see games as a solution for the stay-at-home problem right now. They offer a good distraction and entertainment and allow you to connect with friends and family remotely. And even post-virus, games should continue to grow for digital-native generations.
Microsoft (MSFT), which we own in the Profitable Investing model portfolios, has Xbox—the No. 2 console system behind Sony’s (SNE) PlayStation.
Gaming products, services and devices make up between 6%-9% of quarterly revenues for Microsoft. So, on top of its Azure cloud computing and its ubiquitous software for remote work and stay at home, games continue to be a good driver of revenue and growth for the company.
Since being added to our model portfolios, it has generated a return of 770%. And it isn’t just a good stock… it’s a leader in the US information technology space.
Microsoft (White) & S&P Information Technology Index (Orange) Total Returns—Source: Bloomberg Finance, L.P.
Including the mess in March, Microsoft has returned 46.3% over the trailing year, which is way ahead of the S&P Information Technology Index’s return of 34.5%.
Microsoft (MSFT) remains a buy for both income and growth, ideally for a tax-free account.
I’ve also taken a deep dive on gaming content stocks.
One that stands out is Activision Blizzard (ATVI). The company is a combination of Activision, Blizzard and King.
Activision has its Call of Duty franchise where players simulate combat in various scenarios.
Blizzard has World of Warcraft, StarCraft and Overwatch, all of which are wildly popular massively multiplayer online role-playing games (MMORPGs) that can be played together with friends and family.
King has all sorts of other game franchises, including Candy Crush and hundreds of other notable titles.
And its games work on various platforms from Apple (AAPL), Alphabet’s (GOOGL) Google as well as Sony. And it also develops games for other brands, including Marvel (Disney, DIS) and Dreamworks (Comcast, CMCSA).
I like that it has varied platforms for its games. It gets to profit from fixed location devices and consoles now, and mobile gaming post-lockdowns later.
And data collection is all baked into the business model, as the company knows all about what its customers are doing, making for a lot of value for the company.
Activision Blizzard (ATVI) Total Return—Source: Bloomberg Finance, L.P.
The stock has been a very good performer year to date, generating a return of 27.3% compared to the loss in the general S&P 500 Index.
Revenues have been fluctuating over the past few years, but its 24.8% operating margins are huge despite big development costs for games.
In turn, the company generated a return on equity of 12.7%. It has gobs of cash, running at 250% of current liabilities. And debts are a minor item, with debt to assets at a meager 14.9%.
Unlike the vast number of its peers, it pays a dividend—41 cents and rising over the past five years by an annual average of 12.3%. It’s a small 0.56% yield, but it demonstrates to me that ATVI values its shareholders and makes sure to pay them a cut along the way.
The stock is valued as a tech company, with a price to underlying book at 4.32 times and a price to sales running at 8.7 times. But these measures are not out of line.
Activision Blizzard (ATVI) is another great buy in the gaming space, ideally for a tax-free account.
All My Best,
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life
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