Mobile Gaming is hot! Indeed, Zynga, the developer of such popular digital past-times as Words with Friends and Cityville, reports that the number of people playing its games on mobile platforms (as measured by Daily Average Users, or DAU’s) increased more than ten-fold in the short span of eight months (ended June, 2011). Further indicative of the sector’s radiance are the valuations being accorded mobile-game developers. Electronic Arts (ERTS), for example, recently paid $750 million for PopCap, the marketer of the Bejeweled and Plants vs. Zombies franchises. The price tag was approximately seven times PopCap’s annual revenues. Comparatively, shares of Electronic Arts trade for about two-and-a-half times trailing sales.
So, what’s all the buzz about? Dedicated mobile gaming platforms, like Sony’s (SNE) Play Station Portable and Nintendo’s Game Boy, have been around for ages, but it’s only fairly recently that ‘gaming on the go’ has reached a critical mass.
The growing popularity of smart phones is certainly one of the major factors behind the current mobile-gaming craze. Sales of smart phones in the United States increased upwards of 40%, to approximately 67 million units, in 2010. A similar jump is likely this year, as a growing number of consumers trade up from less-intelligent so-called feature phones. The latest smart phones are particularly well suited for mobile gaming, with their high-resolution touch screens and built-in accelerometers.
Low prices are also making mobile games more accessible to the masses. While game cartridges for (non-mobile) console platforms like Microsoft’s (MSFT - Free Microsoft Stock Report) XBox and Sony’s Play Station can run upwards of $50 a pop, many mobile games cost one or two dollars, while others are ad-supported and are, therefore, free to play. Finally, mobile games of the multi-player variety are often an extension of social media sites like Facebook and are increasingly a popular way for friends to stay in touch.
Investors can participate in the mobile gaming craze any number of ways. The most obvious is through the shares of the many publicly-held games developers. San Francisco-based GLU Mobile (GLUU), the publisher of such hits as Bug Village and Contract Killer, is a decent choice here. So, too, is Paris-based GameLoft (GLOFF), whose shares are traded on both France’s main stock exchange and the pink sheets in the states. Zynga, meanwhile, hopes to go public soon, as does Rovio, the Finland-based developer of the highly-popular Angry Birds game. Traditional console game publishers, like Electronic Arts and Activision Blizzard (ATVI), are also making a big push into the space and are, therefore, worth watching.
Apple (AAPL) and Value Click (VCLK) are arguably better mobile-gaming plays, in part, because their success isn’t tied to that of a specific game title. The iPhone maker is the ultimate gatekeeper and gets paid a cut of the revenue from mobile-game and other app developers that sell their wares through its App store. ValueClick, meanwhile, is a big player in mobile advertising and its Greystripe unit provides ad support for several popular mobile games.
Investors should nonetheless tread carefully in the mobile-gaming space. Most of the mobile-game developers have been in business for a relatively short time and it’s still somewhat unclear if there’s ultimately a lot of money to be made here. Revenues may suffer, if, for example, response rates to in-game ads are too low. Many mobile-game marketers also rely on the sale of “virtual” goods that make the in-game experience richer but are, by no means, required to play a game. In a still-tough economy, gamers may very well balk at paying even a dollar for a virtual weapon upgrade. Too, there is the not-so-insignificant risk that, as more mobile game developers decide to go public, the stock market will become oversaturated with shares and that the supply-demand imbalance will lead to relatively weak share-price performances.
At the time of this article’s writing, the author had positions in: GLOFF