Living in an urban area you are forced to get a little closer to people then you would typically like. On occasion, my morning commute can get pretty crowded and there is little room for me to browse my phone. This can be upsetting as this is a good time to absorb as much financial news as possible.
When I find myself in this predicament I like to observe and watch what others are doing on the car. I try to pick up on trends, fashions, habits, electronic preferences and even popular music if I’m unlucky enough. Lately, I’ve noticed one trend that seems to be taking over my fellow city dwellers commute time: mobile gaming.
All around me, I see every age playing seemingly every mobile game available. Whether it’s Clash of Clans, Candy Crush or even the classic Tetris, people are addicted and becoming comfortable playing and paying for these types of games.
And the numbers are showing just that it’s not just a trend on the Brown Line in Chicago. Looking at the chart below we see that not only is gaming popular, but tablets, smartphones and watches are looking at double digit revenue growth going into 2018. During the same time, TV/console gaming is expected to fall.
The companies involved in this transfer of gaming to mobile are seeing benefits in the form of solid revenue and EPS growth. Below I list three companies that are taking advantage of the mobile consumer and are either Zacks Ranked #1(Strong Buy) or #2(Buy) stocks.
Netease (NTES) is a Zacks Rank #1(Strong Buy) that is an Internet technology company engaged in the development of applications, services and other technologies for the Internet in China. The company partners with Blizzard Entertainment and also provides email, ecommerce, and advertising services. The Beijing based company was founded in 1997 and has almost 13,000 employees.
Netease has a market cap of $20 billion and a forward PE of 16. The stock sports a Style Score of “B” in Growth and Momentum and pays a yield of 2% after a 14% dividend raise last week.
The company reported Q1 earnings on May 11th in which it saw EPS at $2.88 verse the $2.31 expected. Revenue came in at $1.23 Billion, a 116.3% jump year over year. The online gaming segment revenue came in at 6.0 Billion Yuan verse the 2.9 Billion year over year, more than doubling last year’s numbers.
The beat was the fifth straight surprise to the upside and the stock has jumped over 10% since the numbers were released. There is reason to believe this price momentum continues as estimates have shot through the roof. In addition, Nettease has seen upgrades from multiple brokerages, with price targets near $200.
Electronic Arts (NASDAQ:EA) (EA) is a Zacks Rank #2(Buy) that develops, publishes and distributes game software content and online services for video game consoles, personal computers, mobile phones and tablets. The company was founded in 1982 and operates in tow segments: EA Core and EA.com, the later handling the online portion of the business. Popular games include EA sports, Madden, Plants vs Zombies, Dragon Age and The Sims.
EA has a market cap of almost $23 Billion and a forward PE of 42. The stock sports a Zacks Style Score of “C” in Growth and “B” in Momentum. The company pays no dividend, but sees expected EPS growth rate of 15%.
On May 10th the company reported Q4 earnings, beating on revenues and surprising by 8 cents to the upside. While EA is a more traditional video game developer, they have transitioned into online and mobile applications that have been received well.
EA now reports more than 54 million unique players engaged with EA SPORTS console titles during fiscal year 2016, up 65% from last year. In addition popular games like Star Wars Battlefront, The Sims 4 and Madden NFL mobile are seeing double digit growth.
The earnings beat was the company’s twelfth straight beat. Looking forward to the current year, estimates have been are heading higher over the last month, from $3.02 to $3.08. If mobile and online gaming continues its momentum, we should see more beats from EA and a possible breakout above the $76 level.
Momo (MOMO) is a Zacks Rank #2(Buy) that is a Mobile-based social networking platform that also offers mobile gaming services. The company also provides membership subscriptions and other services for mobile marketing services. The Beijing based company has almost 800 employees.
Momo has a market cap of $2 billion and a Forward PE of 45. The company sports a Zacks Style Score of “B” in Growth and “A” in Momentum. There are obvious valuation concerns for investors as the high PE gives the stock a Style Score of “F” in Value.
Momo is another play on China mobile gaming and if the numbers are anything like Netease we should see a pop in the stock when the report on May 17th. This stock is flush with short sellers with 36% of the float short that will have to cover if Momo puts together a solid quarter.
The stock has been pretty volatile since becoming an IPO, this quarter could help the it finally pick a direction and start to trend.
In Summary
Observing what people are doing around you can lead to some quality investment ideas. Mobile gaming isn’t just a fad; it’s seemingly an addiction that all ages are getting comfortable with. Whether in China or the US the companies that develop and make money off providing the games are benefiting. As this story plays out, pay attention to the growth numbers of each company in mobile and keep your money with the winners.
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Zacks Investment Research