Game On For Profits

The global video game market is, well, the greatest show on earth for millions of "gamers" looking for the next emperor to conquer or to beat the Seahawks on Madden 2013.

And what a show it is.

According to Gartner, Inc., the global video game market is valued at $93 billion (for 2013). That's up from $79 billion in 2012, and company analysts expect the market to grow to $111 billion by 2015.

Mobile gaming is largely driving the run-up in industry sales, as users lock and load game after game on their iPhones, Kindles, and tablet devices. Gartner says that mobile gaming revenues will grow from $31 billion in 2013 to $22 billion in 2015.

And after that, look out.

“As mobile devices (smartphones and tablets) continue to grow, the mobile game category will show the biggest growth due to the entertainment value provided by games compared with other app categories,” notes Brian Blau, research director at Gartner. “This growth is fueled by healthy premium mobile device sales globally and a desire by consumers to play games on these multifunction devices that are capable of displaying increasingly sophisticated game content.”

The best move to make in this sector is go where all those teenagers and 20-somethings are going, and follow the money with the most popular video games on the market.

Right now, that means Activision Blizzard (NASDAQL ATVI), which is raising a lot of eyebrows on Wall Street.

The stock reached an all-time high last Friday, before dropping back about 2 percent in active Monday trading. The buzz centered around Activision's fourth quarter earnings, and the rousing success of its marquee games – Call of Duty and World of Warcraft.

Quarterly revenues clocked in at $2.27 billion, ahead of consensus analysts call for $2.22 billion. Earnings per share (EPS) were ahead of expectations, too, at $0.79 (or $0.06 ahead of ! analysts' outlook for the quarter).

Besides the healthier stock price, the company has shown good management, with low debt levels and fatter profit margins.

But it's the games that pay for investors, and Activision is rolling them out, one after another, in 2014.

First up is Diablo III, a popular action-oriented role playing game. A new version is slated for release later this year.A new version of World of Warcraft is due out this year.Another action-oriented game – a new one called Destiny – is slated for a September 9, 2014 release. Analysts say Destiny could boost revenues by $500 million this year alone.Call of Duty is being released in China for the first time, adding another potential $300 million to Activision's coffers. On a global basis, Call of Duty earns over $1 billion for Activision annually.Digital streaming is proving to be a big game-changer for the entire industry, but especially so for ATVI. Digital support streams services such as downloadable content, full game downloads, in-game advertising and subscriptions, accounted for 25 percent of the company's sales in Q4, and 34 percent for the entire year. Management says those numbers should rise in 2014, and really take off in 2015, giving Activision another huge profit center.

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"2013 was a transformational year for Activision Blizzard and for our industry," says Bobby Kotick, Chief Executive Officer at Activision. "The continued success of our games delivered better-than-expected financial results, including stronger net revenues and earnings per share, and over $1.26 billion in operating cash flow."

"As we look to 2014 and beyond, we have the strongest and most diverse pipeline of games in our history, Kotick adds. "In 2014, we expect these releases to enable us to grow non-GAAP revenues year over year and generate record non-GAAP earnings per share.
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On th! at front, Kotick expects Destiny to be its next $1 billion franchise. He also says that the next game up in the Warcraft series – Hearthstone – will be available on tablets and smart phones, expanding the game's "playability" by millions of customers.

Kotick is bullish on 2014, as management has provided early guidance for the year, with non-GAAP 2014 revenues clocking in at $4.6 billion, and EPS guidance of $1.26 – solid numbers for opportunistic video gaming industry investors.

As Michael Pachter, a gaming industry analyst at Wedbush Securities puts it, "This is a company that knows how to make money." He has labeled ATVI as "outperform" based on its Q4 numbers.

It's also a company that returns a lot of that cash to shareholders.

"Over the last five years, through dividends and share buybacks, we have returned almost $10 billion dollars to our shareholders and today we announced an increase to our annual dividend and repayment of $375 million of debt," Kotick adds.

I see Activision really gaining momentum in 2014, with a robust line-up of products that gamers love to play. Look for the stock to move to north of $24 in the next six months, and if Destiny takes off, look out – it could be game over for industry competitors.

Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.

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