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EA, Activision soar: Consoles aren't dead

March 13, 2014: 12:56 PM ET
Activision is at an all-time high thanks to the

Activision is at an all-time high thanks to the "Call of Duty" franchise. Investors love EA too.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Traders are salivating about the upcoming initial public offering of mobile game developer King Digital Entertainment, the company behind the insanely popular "Candy Crush Saga."

King disclosed Wednesday that it could be worth $7.6 billion following its IPO -- which could take place as soon as the end of this month. That revelation helped boost shares of already public smartphone game makers Zynga (ZNGA) and Glu Mobile (GLUU).

Related: Maker of Candy Crush files for IPO

But guess what? The old-school video game companies are getting their fair share of love from Wall Street too -- even though they are still more well-known for the supposedly dying business of producing software for consoles like Microsoft's (MSFT) Xbox and Sony's (SNE) PlayStation.

Shares of Activision Blizzard (ATVI), the company behind the "Call of Duty" franchise, hit an all-time high Thursday after a BofA/Merrill analyst upgraded the stock to a "buy." And Activision rival Electronic Arts (EA), which actually was downgraded by BofA Thursday, is red hot too.

In fact, EA recently nudged ahead of Facebook (FB) and BlackBerry (BBRY) to become the best performer in CNNMoney's Tech 3o index this year. EA is up nearly 30% in 2014. (Activision is in our index too. It's the fifth-best stock of the Tech 30.)

Then there's Take-Two Interactive (TTWO). Shares of the company most famous for its controversial "Grand Theft Auto" games are up 22% this year.

What gives?

I'll admit that I'm surprised these companies are doing this well. I still associate Activision with Atari 2600games from my youth like "Kaboom!" and "Pitfall!" Watch out for those crocodiles!

And I haven't played a console game since college in the mid-1990s. Still, I will always have a soft place in my heart for EA's NHL '94, the hockey game that was immortalized in "Swingers." Jeremy Roenick was superhuman. Poor Wayne Gretzky.

(Warning. There's a LOT of profanity in the clip below. Don't watch if you aren't a fan of cuss words. Vince Vaughn and Jon Favreau have potty mouths.)

Simply put, many people enjoy playing games on big screens as opposed to smartphones and tablets. They also like games that are more sophisticated than just moving brightly covered pieces of candy into different tiles.

Confession. I'm not one of them. I'm pretty retro when it comes to mobile games. I love the Pac-Man app. And the "Fix-it Felix, Jr." game that's a tie-in to the "Wreck It Ralph" movie from Disney (DIS) and is essentially a re-imagining of "Rampage" and "Donkey Kong."

But the console game developers are still making big bucks from the hardcore fans who buy games the day they are released.

The optimism for EA seems to be largely about a new combat game called "Titanfall" that will be released exclusively for Microsoft later this year. EA is also still raking in big bucks from its 25-year old Madden football franchise. That game is pretty much the technology equivalent of an annuity for EA.

Related: Madden has been a $4 billion franchise

And Activision is adored by investors mainly because of "Call of Duty" -- which Wedbush Securities analyst Michael Pachter thinks could be a hit in China when the game launches there. Pachter also said in a recent research report that Activision's upcoming "Destiny" game could be a blockbuster that generates $500 million in sales.

So the top "old" game companies are doing well for a pretty simple reason. They continue to sell a lot of games. Earnings are growing. And the stocks are pretty reasonably valued.

Take-Two is the cheapest stock of the bunch, at just 5 times earnings forecasts. But its product portfolio isn't as diverse as its two big rivals. Its fortunes (and stock) tend to rise and fall along with the release of new GTA games.

Analysts expect EA to report annual earnings increases of 20% for the next few years, according to FactSet. Shares trade at 22.5 times earnings estimates for this year. Activision's earnings are forecast to rise at a 12.5% clip for the next few years. Shares trade at 16 times 2014 profit projections.

Sure, investors may go gaga for Candy Crush Saga (not to be confused with Sugar Rush from the aforementioned "Wreck-It Ralph") once King's stock starts trading.

But consoles aren't dead. People still like to shoot stuff and pretend they are professional athletes in their spare time on screens that are larger than ten inches.

Reader Comment of the Week! Before Herbalife (HLF) took a tumble on the news of the FTC's investigation of the nutritional supplements company, I joked on Twitter about how Bill Ackman may need to give up on his seemingly quixotic crusade to bring the company down ... and profit from his $1 billion short against it.

I cited an Oscar-winning song in my tweet.  You may have heard it before. I think that someone named Adele Dazeem sang it? Anyway, a fellow member of the financial journalist club wins Reader Comment of the Week for twisting one of the lyrics in a very clever way.

Good one, Carl! Say hi to former CNNMoney managing editor Allen Wastler for me! And I'm very excited for the DVD release of "Frozen" next week. As is Buzz, Jr.

Hmm. It just dawned on me that there have been a lot of Disney references in this column. Sorry Time Warner (TWX) overlords! But Buzz. Jr and I did love "The LEGO® Movie." You go, Bros. of Warner! Everything is awesome!

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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