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Not All Gaming Stocks are Winners

Let’s face it, kids aren’t playing with toys anymore these days, they are playing with mobile devices. In recent years, sales of Barbie dolls and Matchbox cars have deteriorated, leaving traditional toy companies like Mattel in the dust. Classic toys are being left on the shelf, while not only children, but adults, increasingly spend more time playing with entertainment apps and social video games… but does the popularity of these apps mean you should invest in them?

The gaming industry is a battle of blockbusters. A single big hit can drive years of profitability for a game studio. This is true for both mobile game companies such as King Digital and Zynga, as well as their console game counterparts such as Electronic Arts and Activision Blizzard. However, there are a few key differences between these two spectrums of the gaming market that makes one a less risky investment.

*Note: KING’s EPS and revenue growth rates are only based on FQ1 2015 as the company IPO’d in FQ1 2014.

The mobile games landscape is solely a “hits” business. A hit can allow companies like King to run up huge valuations in an initial public offering if they produce one smash hit, often debuting on the stock exchange to much fanfare. But at the end of the day they will need use all of the cash they raise to hire an army of developers and they’d better come up with something at least as good as the game that got them there. There is a huge risk involved...