Fortnite has swept gamers off their feet and taken the world by storm. Sounds dramatic, right? But it’s true. The game has tens of millions of players, Amazon’s (NASDAQ:AMZN) Twitch is loaded with Fortnite streams and $100 million in prize money is being doled out in e-sport competitions for it. Where does that leave traditional video game companies and which game stocks should you buy?
If you want to invest in Fortnite, you’re out of luck — Fortnite is made by Epic Games, a privately-owned company. However, Tencent (OTCMKTS:TCEHY) does have a 40% stake in the company. So while you can’t directly put your cash into the Fortnite-maker, does it matter?
While Fortnite is causing a notable ripple in the video game industry, not all game-makers are worried.
Even as Fortnite steals time away from the games made by Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts Inc. (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO), there’s an opportunity there. Part of why Fortnite is thriving is because of its battle royale game mode, pitting 100 players against each other to see who lasts until the end.
However, we should see these modes introduced to Activision’s new “Call of Duty” and EA’s “Battlefield” games. In other words, ATVI, EA and others can find a silver lining to Fortnite’s success. Plus, Fortnite shouldn’t dent sales too much. Since the game has a free-to-play model, gamers aren’t dishing out $40 to $60 for the game. So sales of NBA 2K, Destiny 2 and other top names shouldn’t see much impact.
Top Video Game Stocks
It’s easy to look at gaming stocks and simply buy the biggest of them all, that being ATVI with its ~$54 billion market cap. While I’ve long liked ATVI — particularly after its bizarre earnings release earlier this month — I’ve also been a big supporter of the basket approach. The reasoning is simple: all of the major game-makers have triple-A franchises.
Take-Two has “Grand Theft Auto” and the upcoming “Red Dead Redemption” series. EA has Battlefield, Fifa, Madden and countless other classics. Activision has “Call of Duty,” “Destiny” and its Overwatch e-sports league. Instead of picking just one, why not diversify and own all three?
After all, video game stocks are riding a strong wave of momentum, as the industry is enjoying more than a short-term fad. In fact, game stocks are riding a secular trend, benefiting from increased sales and engagement. Profitability continues to climb as in-game purchases and easy over-the-air updates make gaming more fun and extend the product’s life.
Case in point: EA is the worst performer, up “just” 21% over the past year, trailing ATVI’s 24% gain and TTWO’s massive 62% gain. And while one might kick themselves for owning EA rather than TTWO, consider that the former is up 25% in 2018 vs. the latter’s climb of just 2%.
Diversifying can be beneficial even within the same sector. It’s not always recommended, but it can help investors eliminate single-stock risks while still enjoying the secular growth within a concentrated industry.
Chip stocks are a great example. While each company is quite different, owning a piece of Nvidia Corporation (NASDAQ:NVDA), Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC) has been a really sound strategy for investors over the past 12 to 24 months.
Other Gaming Stock Plays
Still looking for the next Fortnite but want more than just video game stocks? How about trying a company like Nintendo Ltd/ADR (OTCMKTS:NTDOY). Although shares are up massively over the past year, management is still looking for strong sales of the Switch and growth remains promising. Further, its stock is setting up nicely.
There’s also Microsoft Corporation (NASDAQ:MSFT), a diverse tech company that makes the Xbox, as well as Sony Corp ADR (NYSE:SNE), which makes the PlayStation and has plenty of other business segments.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.