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Apr 13, 2017

Throughout the technology sector, businesses have been forced to adapt to wildly evolving consumer behavior over the past several years. The video game industry is no exception. During a special edition of the Zacks Friday Finish Line, hosts Ryan McQueeney and Maddy Johnson were joined by Andrew Chanin, the CEO of PureFunds, in order to parse through this ever-changing market.

 

PureFunds is a New York City-based research firm that serves as the sponsor of 8 different thematic ETFs, including funds that focus on big data, cyber security, and health and medical technology. In particular, Andrew discussed Purefunds’ Video Game Tech ETF (GAMR), the world’s first ETF that focuses on the video game industry. It was created in order to offer a way to invest in the increasingly popular and important video game tech sector.

State of the Industry

Andrew gave gave insight on both traditional gaming powerhouses and new, emerging players in the industry, as well as the many technologies that go into our favorite games.

 

Technologies like virtual and augmented reality are now a playable reality, and just as streaming services like Netflix (NFLX) have caused an uproar in television and film, a growing desire for subscription-based and free-to-play games has altered the business model of some companies.

 

We have also seen a massive spike in the popularity of competitive gaming. Dubbed “esports,” professional gaming competitions are bigger than ever. The world’s top players frequently duel it out in front of massive online audiences for millions of dollars in cash prices. (Also Read: Esports is The Next Billion Dollar Industry: 3 Stocks to Watch)

 

Furthermore, video games have become increasingly casual thanks to the advent of smartphone gaming. While mobile gaming was once seen as almost a different field entirely, even traditional game publishers have been forced to start designing with the smartphone gamer in mind.

 

Stocks to Watch

In addition to GAMR, there are also many stocks in the industry for investors to consider. The first video game giant to consider right now is Activision Blizzard (ATVI). The company has a history of crushing earnings estimates, and in particular, its last report reflected a record year for Activision, showing growth in key areas like digital gaming.

 

Interestingly enough, Activision Blizzard said that sales of its popular Call of Duty franchise actually “underperformed” in the quarter, but this really just highlights the depth of the company’s portfolio right now. Activision Blizzard owns seven franchises with more than $1 billion in life-to-date revenue, and its habit of investing in talented and passionate developers has led to recent hits like Destiny, Overwatch, and Skylanders.

 

While Activision’s release schedule is a bit lighter in 2017, the company is slated to release a sequel to Destiny, which promises to be one of the industry’s biggest games of the year. Investors can expect Activision’s next earnings report in early May. Currently, ATVI has a Zacks Rank #2 (Buy).

 

Another stock to check out is Nintendo (NTDOY). The iconic Japanese gaming company, known for games like The Legend of Zelda and Super Mario Bros., came back with a bang this year with its new gaming console Switch. Switch combines the functionalities of both a traditional console and a handheld device, and was designed to attract those casual gamers who are increasingly going mobile.

 

While it’s unclear if Switch will have a huge impact on shares of Nintendo, the device is, without a doubt, off to a great start. Great reviews have boosted initial sales, and many games like The Legend of Zelda: Breath of the Wild, which is available now, and Super Mario, coming this holiday season, should bolster sales even more. Nintendo expects year-over-year earnings growth of over 68% for the current quarter, with long-term EPS growth of 27.27%. NTDOY is a #1 (Strong Buy) on the Zacks Rank.

 

While this company is not a conventional game developer, Advanced Micro Devices (AMD) manufactures the graphics chips for your favorite games, specifically hit PC games like DOOM and Battlefield 1. AMD’s gaming products, like the Radeon graphic chip series, continue to rapidly gain adoption, driving recent top-line growth. The company is also betting aggressively on virtual reality, and unveiled last year its VR-optimized GPU Radeon Pro Duo, which it believes is the most powerful GPU available for professional VR content creators.

 

Despite stiff competition from rivals like NVIDIA (NVDA), AMD stands to benefit from the bullish projections for total video game revenues, especially given its popularity among gamers. The company has long-term EPS growth of 78.86%, and sits at a #2 (Buy) on the Zacks Rank.

 

Bottom Line

While some concerns, like the demand for new consoles, still loom over the industry, many interesting things are happening right now throughout the video game market.

 

Even Amazon (AMZN) is getting in on the action. The e-commerce giant, which purchased video game streaming outlet Twitch in 2014, will now directly advertise and sell games on the platform (also read: Amazon To Sell Gaming Content On Subsidiary Twitch).

 

Despite all of the changes throughout the industry, we can still judge video game stocks by the strength of their sales and the company's ability to effectively cash in on the latest gaming trends.

 

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