Investors have been upbeat about video game stocks in recent months, and the massive gains delivered by the likes of Activision Blizzard, Electronic Arts, Glu Mobile (NASDAQ: GLUU), and NetEase (NASDAQ: NTES) are a clear indication of this sentiment. These gaming stocks have outperformed the broader market handsomely in 2017.
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The popularity of video game stocks isn't a surprise. Video game sales have been growing at a staggering pace. In July, for instance, overall video game sales jumped 19% year over year in the U.S., per estimates from NPD Group. Looking ahead, the trend is expected to continue as global video game revenue is forecasted to grow 27% by 2020 compared to last year.
Therefore, it won't be surprising if these video game companies, especially Glu Mobile and NetEase, keep rising given their smart moves to tap the secular end-market growth.
Glu Mobile's renaissance
Glu Mobile has staged an impressive comeback this year. Its games have started bringing in the dough thanks to its strategy of developing franchise-based titles in place of one-hit wonders. These franchise-based titles are capable of generating revenue on a recurring basis as they are regularly updated with new features and gameplay experience, encouraging users to spend more money on in-game purchases.
More importantly, Glu has outlined a strategy of relying on big-name titles going forward. For instance, the company is developing a game in collaboration with WWE that will feature names and likenesses of wrestling superstars and legends. Glu has made it clear that it is going to use the storylines usually seen on WWE to build an easy-to-play game with simple controls, tapping the same studio that has developed its highly popular Tap Sports Baseball franchise.
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Glu Mobile expects to launch this title sometime in 2018 to tap the casual sports gaming genre. Once launched, the title could become a big deal for the mobile gaming specialist given the popularity of WWE across the globe. As it stands, WWE's two marquee shows, RAW and SmackDown, pull in more than 5 million viewers a week, setting the stage for potential windfall gains in the future.
Additionally, Glu is going to rely on celebrity firepower to boost its financials. Back in 2016, it had signed a partnership with Taylor Swift to develop a mobile game for her, and this title is set to be launched late in 2017. Glu has already made big money with a celebrity-centric game as its Kim Kardashian Hollywood title has roped in revenue of $100 million in just the year and a half since its launch, so the Taylor Swift-based game could turn out to be another hit and catalyze Glu's revenue in the long run.
NetEase gears up to tap mobile growth
NetEase has been increasingly relying on the mobile gaming business for more of its revenue. Last quarter, the company pulled 73% of its total revenue from mobile. As it turns out, mobile's contribution to the company's business has taken off remarkably in recent quarters, rising from just 61% a year ago.
The massive growth in NetEase's revenue in this space can be attributed to its strategy of porting its already-popular PC client games to the mobile platform, as well as developing new titles from scratch. This is a shrewd strategy as Newzoo forecasts that global mobile gaming revenue will jump from $38.6 billion last year to almost $65 billion in 2020.
More importantly, China is set to account for almost a third of global mobile gaming revenue by the end of the decade. NetEase, therefore, is doing the right thing by changing gears and setting itself up to benefit from the secular growth opportunity in mobile gaming.
NetEase's commercial launch of the Microsoft-owned Minecraft title on the mobile platform in China this year could substantially enhance its revenue given the game's popularity in international markets. As it stands, Minecraft has more than 100 million registered users globally, and over half of its players in the Asia-Pacific region are on the mobile platform.
What's more, investors get a cheap entry into the video game market with NetEase since it trades at less than 19 times last year's earnings. This is way lower than the industry median of over 33, and it makes the stock a value play given its long-term potential.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and NetEase. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.