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The time is right to consider investing in video game companies.

That’s because three major players only recently released new gaming systems, says Michael Orndorff, vice president and portfolio manager at American Century Investments. He co-manages the Renaissance U.S. Equity Growth Fund.

He’s referring to the Playstation 4 and Xbox One (which were both released in 2013 by Sony and Microsoft, respectively) as well as 2012’s Nintendo Wii U. Before the release of the Wii U, he adds, no new systems had been released for about seven to eight years by any of those companies, and that was one of the longest hardware-update gaps in video game history.

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Orndorff predicts the future is bright for these companies since they typically find ways to boost profits in “the second and third year that [consoles are] out.” At that point, they’re able to add features and enhance hardware, and that leads to “a nice lift in revenues.”

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In terms of the hardware cycle, other gaming companies should also start to see a boost in profits due to increased demand for new games and accessories for these consoles.

Additional trends

Video game companies will also benefit from including increased storage capacity on their new consoles, says Orndorff, as well as from the availability of faster Internet.

Since consoles have more storage space and faster connections, he adds, the popularity of digital downloads of content has grown. “Profitability improves significantly when you [can offer] digital download[s] versus selling a package to a consumer. Margins with the digital downloads are 80%,” versus 50% when companies sell games through retail locations.

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“All [game] companies will benefit from this trend,” says Orndorff, “and they’ll build more sustainable, profitable businesses over time.”

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What’s more, companies such as video game developer EA, or Electronic Arts, can take advantage of the increased use of mobile devices. For example, it “used to charge a reduced fee for the ability to play one of their sports [games] on a mobile device.

“But now, [it’s offering] free-to-play [content] and then collecting revenues on sales of add-ons” and expansion packs. This trend will increase the distribution of games, says Orndorff, and “over time, [will] provide an opportunity to generate more revenue and more profitability out of that business.”

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Originally published on Advisor.ca

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