According to the Entertainment Software Association, in 2006, the US computer and video game software sales grew to $7.4 billion, tripling industry software sales since 1996. This is a large, high growth industry.
In addition, there are other reasons to be bullish on the Video and Computer Game Sector:
- We are at the beginning of the Gaming Cycle with three major gaming consoles out (Nintendo Wii, Sony Playstation 3, Microsoft Xbox, plus Nintendo DS, Sony PSP, and other devices),
- Growth in online gaming in the United States, and in other emerging countries such as China, whose middle class is growing and increasing their purchasing power.
- Demographics favors growth in the industry. Generation Y is 2nd in size to the Baby Boomers, and they've grown up with games and computer and internet interactivity.
Demographics of the Computer and Video Game User
According to the Entertainment Software association, here are some facts about the US Game Playing Demographic:
- The average game player is 33 years old and has been playing games for 12 years.
- 38% of all game players are women.
- The average age of the most frequent game buyer is 40 years old.
- Age of game Players: 31% under 18 years old, 44% 18-49 years old, 25% 50+ years old.
- Average Adult woman plays 7.4 hours per week. Average adult male, 7.6 hours per week.
- 44% of frequent game players say they play games online.
- 58% of online game players are male, 42% are female.
- Those gamers 18 years and younger tend to play console games more, and those over 35 tend to play computer games more.
- 32% of heads of households play games on a wireless device such as a cell phone or PDA.
- 35% of American parents say they play computer and video games. 80% of gamer parents play video or computer games with their children.
The Gaming Console Makers
The main three console makers, Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY.PK) are not listed in the charts below because Microsoft and Sony are not pure plays on video games, and Nintendo is missing some key financial information on Yahoo Finance. I don't think Microsoft or Sony should be bought purely because of their Gaming Divisions. Nintendo, with the popularity of the Nintendo Wii and the portable Nintendo DS, might be worth researching as a stock to invest in.
Gaming Retailers
The dominant Gaming retailer here is Gamestop (GME), a very good investment whose stock has been doing well, and still only has a MyPEG of around 1. Their former competitor, Electronic Boutique, is part of Gamestop. People can buy games and gaming hardware from other places too such as Best Buy (BBY) and Amazon (AMZN), but these two companies are not pure plays on gaming.
Gaming Accessories
Logitech (LOGI) makes computer accessories and peripherals including devices used by gamers. Nvidia (NVDA) makes programmable graphics processor technlogies, many of which are used and needed by Gamers.
Software makers
Electronic Arts (ERTS), THQ Inc (THQI), Activision (ATVI), and Take-Two Entertainment (TTWO) are all gaming software makers. Atari (ATAR), Konami (KNM), and Majestic Entertainment (COOL), were not listed below because they are lacking some financial information from Yahoo Finance. Among these, from a growth at a reasonable price (GARP) view, THQ Inc. (THQI) with a MyPEG of only 0.76, very cheap. Electronic Arts (ERTS) still remains one of the major players in the gaming software industry, and sports a MyPEG of 0.95.
Mobile Gaming
Glu Mobile (GLUU) is a small company providing some games on mobile devices. Their former competitor, Jamdat, was bought out by Electronic Arts (ERTS).
China Gaming
The China Gaming market is a very big market. The Chinese middle class is growing and showing their increasing purchasing power. According to play.tm, and according to research from American Market research firm, DFC Intelligence, "analysts predict strong growth for online games in China. Following the trend of South Korea, online gaming is already one of China's favourite pastimes, but it is expected to be worth a great deal more by 2010: 1.7 billion USD we're told. That's up from a 2005 value of about 560 million USD. " "The game market in China is all about online play and charging by usage. There is even a growing market for the items used in games like weapons and characters," states Alexis Madrigal, one of the experts behind the new report."
The three main players in this market are Shanda Interactive (SNDA), The9 Limited (NCTY), and NetEase (NTES). Shanda Interactive and The9 Limited seem the most investable, having MyPEGs of 0.56 and 0.71 (very cheap). The9 Limited has the right to bring Blizzard's World of Warcraft to China. Shanda Interactive also has a good business model. According to a China online gaming survey conducted by Piper Jaffray, "55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within the games. Shanda also tied with competitor The9 Ltd. as the company in its market that offers the best games."
International Gaming
There are other International Gaming plays such as GigaMedia (GIGM), a Taiwanese company, "through its subsidiaries, develops and licenses online gaming software, and provides application services, as well as owns and operates an online games portal." Gigamedia has a very low MyPEG of 0.36. Even if people don't trust the 40% growth rate, the forward PE is still a low 15.67, so GigaMedia seems like a good value with respect to its growth.
According to the American firm DFC Intelligence, online gaming is also popular in Korea. I wouldn't be surprised if there is good growth all around the world, and growth in the online gaming market.
By the Numbers
Data taken from Yahoo Finance on Friday, July 6, 2007:
| Symbol | Stock Name | MyPEG | Forward PE | 5 yr growth | Yield |
|---|---|---|---|---|---|
| GIGM | GigaMedia | 0.37 | 15.67 | 40.00% | 0% |
| SNDA | Shanda Interactive | 0.56 | 19.20 | 27.27% | 0% |
| NCTY | The9 Limited | 0.71 | 19.72 | 25.18% | 0% |
| THQI | THQ Inc. | 0.76 | 17.94 | 18.23% | 0% |
| NTES | NetEase | 0.92 | 15.36 | 13.00% | 0% |
| ERTS | Electronic Arts | 0.95 | 25.84 | 22.04% | 0% |
| NVDA | Nvidia | 0.98 | 20.84 | 19.46% | 0% |
| GME | Gamestop | 1.03 | 22.46 | 20.75% | 0% |
| ATVI | Activision | 1.06 | 32.00 | 24.75% | 0% |
| LOGI | Logitech | 1.14 | 18.09 | 14.62% | 0% |
| GLUU | Glu Mobile | 1.57 | 48.79 | 25.00% | 0% |
| TTWO | Take-Two Interactive | 1.67 | 29.97 | 16.71% | 0% |
In order to understand the chart, we have to understand the different elements.
MyPEG
MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link. MyPEG incorporates the yield and cash per share.
Forward PE
Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.
5 Yr Growth
5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
).Yield
The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.
| Symbol | Stock Name | EV/EBITDA | %Short | %Inst. Own |
|---|---|---|---|---|
| GIGM | GigaMedia | N/A | 8.20% | 36.70% |
| SNDA | Shanda Interactive | N/A | 0% | 12.00% |
| NCTY | The9 Limited | N/A | 0% | 35.70% |
| THQI | THQ Inc. | 5.45 | 9.80% | 109.20% |
| NTES | NetEase | 10.092 | 0% | 1.20% |
| ERTS | Electronic Arts | 38.214 | 3.40% | 92.50% |
| NVDA | Nvidia | 18.933 | 6% | 76.30% |
| GME | Gamestop | 14.059 | 3.90% | 81.70% |
| ATVI | Activision | 19.536 | 6.50% | 95.20% |
| LOGI | Logitech | 15.827 | 0% | 3.40% |
| GLUU | Glu Mobile | N/A | 2.70% | N/A |
| TTWO | Take-Two Interactive | 75.161 | 38.50% | 92.30% |
EV/EBITDA
Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.
% Short
The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".
% Institutional Ownership
People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.
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