Penny Stocks To Watch: Are Video Games The Next Big Thing?

| July 21, 2011 | 0 Comments

Video Game ControllerA year ago, most investors had never heard of Zynga.  The small video game developer might have been known to avid Facebook users… but it was far from a household name.

My how things have changed…

Zynga’s super hyped IPO is just around the corner.  And these days, the company is estimated to be worth as much as $20 billion.

How could a developer of simple games for Facebook be worth so much?  Well, it’s somewhat debatable, but any determination of the company’s value starts with their huge number of users.

As of June 2011, Zynga’s Facebook games had over 270 million users.  That’s a solid percentage of Facebook’s 600 million plus user base.  The company’s projected to generate nearly $1 billion in revenue this year from ubiquitous games such as FarmVille and CityVille.

Pretty impressive amount of cash to pull in from people who build virtual farms while chatting with their Facebook friends…

And Zynga’s not the only game developer in the spotlight…

Just last week, game developer powerhouse Electronic Arts (ERTS) purchased PopCap Games in a deal worth $1.3 billion.

Like Zynga, PopCap started as a small video game developer.  But instead of Facebook, they focused on the iPhone and web browsers as platforms for their games.  The company’s most famous game, Bejeweled, has sold over 50 million copies.

So what does Zynga’s and PopCap’s astounding success mean for the rest of the video game industry?

As a matter of fact, I think it’s a very significant development.  And it could be signaling a paradigm shift in the industry.

Here’s the thing…

The video game industry has historically been dominated by larger game developers selling higher priced games.  Many of these games sell for $50 or $60 a pop.

But, those prices aren’t going to fly in a challenging economy.  People just can’t shell out that kind of money right now.

And that’s where Zynga and PopCap come in.

You see, the revamped video game industry will be based on cheaper prices and higher sales volume.  The new industry business model will utilize small, repeatable transactions, such as we’re seeing in games like FarmVille.  And, we’ll see an increase in simple, cheap games like Bejeweled.

Moreover, game developers will attempt to leverage the explosive growth in social media.  Think about it… there’s no way Zynga gets 270 million active users without Facebook’s massive user base.

Here’s the good news for investors…

There are plenty more small game developers out there.  And any one of these penny stocks could be the next Zynga or PopCap.

My advice is to look for video game developers who are producing games for Facebook or the iPhone.  If these companies are financially healthy (reasonable or no debt and some cash in the bank), they could be worth investing in.

Zynga and PopCap make excellent cases for taking a little risk on penny stocks in game development.  The upside potential is well worth the risk.

Yours in profit,

Gordon Lewis

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Category: Penny Stocks to Watch

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