Should Every Diversified Portfolio Have Some Video Game Stocks in It?

In this segment of theMotley Fool Moneyradio show, host Chris Hill, Motley Fool Explorer's Simon Erickson, Supernova and Rule Breakers' David Kretzmann, and Motley Fool Pro and Options' Jeff Fischer ponder what it means when Electronic Arts(NASDAQ: EA) is posting 43% gains near the halfway point of the year, and the best return in the S&P 500 is Activision Blizzard's (NASDAQ: ATVI) more-than-60% climb. You may or may not see the attraction to what they sell, but can you afford to miss out on their profits?

A full transcript follows the video.

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This video was recorded on May 26, 2017.

Chris Hill: We're closing in on the halfway point of 2017. Two of the biggest gainers in the S&P 500 so far are in the video game industry. Shares of Electronic Arts up 43% year to date, and Activision Blizzard the No. 1 gainer in the S&P 500, the stock up more than 60%. David, is this now officially one of those industries where if you have a diversified portfolio, you need to start thinking about making room, some small room in your portfolio, for exposure to video games?

David Kretzmann: I think so. The way these companies are engaging with customers, especially with this transition to digital, it's just such a more attractive and profitable business model compared to selling the physical discs in the store. We talked about Take-Two Interactivein the first segment. They last released Grand Theft Auto V in 2013, and that still makes up over 30% of their revenue today. So, the shelf life of these games is just incredible, and the amount of money that people are spending over multiples of years is really astounding. And then you have e-sports on top of that. A lot of e-sports championship tournaments, like the League of Legends last year had 43 million viewers, which is more than Game 7 of the NBA finals, it's more than World Series. So, the level of engagement continues to tick up, but I think there's still a lot of room for this to grow globally.

Simon Erickson: Plus one for the level of engagement pun, unintended by David.

Kretzmann: I'll take it.

Erickson: Millennials are hard to advertise to. A lot of companies are trying to figure out how to advertise to this growing part of the population. But one way that you can do it is through video games. Rather than advertising on television, you have this new media, which is e-sports, which is these giant platforms where people are playing games, and it's attracting lot of millennials that are watching it, as you pointed out, David. This is a great opportunity for companies to reach that population, too.

Hill: It's interesting. In The Washington Post this week, on the front page of the sports section -- yes, I still get the physical newspaper delivered to my home.

Jeff Fischer: Me, too.

Kretzmann: Dinosaurs.

Hill: So, I can say the front page of the sports section. But, on the front page, there was a story about the University of Maryland e-sports team. Which, I had no idea there were colleges that actually had e-sports teams. And it started as a club sport, and then these students went to the athletic department and essentially asked for permission to use the University name, get branded clothing, all of these kinds of things, and now they're in some kind of tournament. You talk about advertising to millennials. When I think about dominoes to fall when it comes to e-sports, as we see with traditional college athletics, and Nikeand Under Armourgoing to universities and saying, "We'll pay you for your football team and your basketball team and your lacrosse team to wear our uniforms." Is that the next step here? Are we going to see Take-Two Interactive starting to put advertising on college e-sports teams?

Kretzmann: I think that's inevitable. You're already seeing some colleges just give out scholarships, you have some colleges and high schools building e-sports stadiums where spectators can come and watch these events play out. So, I think there's a lot of room for this to grow. It's still a little hard for me to wrap my mind around. But, especially with that younger audience, you have a huge and growing global audience.

Hill: How big a stadium do you need? Can't you just put them in wherever you play basketball on campus? Do you actually need your own e-sports stadium?

Kretzmann: I suppose it depends on the game, but apparently so. You will have these packed stadiums where people come out and watch other people play video games, and it's a growing trend.

Fischer: That's crazy. I mean, I get the camaraderie of that, and the excitement, but why not just put on the VR goggles and watch it that way?

Kretzmann: Maybe in five years.

Chris Hill owns shares of UA. David Kretzmann owns shares of Activision Blizzard, Electronic Arts, NKE, TTWO, and UA. Jeff Fischer has no position in any stocks mentioned. Simon Erickson owns shares of Activision Blizzard and UA. The Motley Fool owns shares of and recommends Activision Blizzard, NKE, TTWO, and UA. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.