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According to Forbes , the global video game industry is expected to grow from $67 billion in 2012 to $82 billion in 2017, registering a CAGR of 7.3%. This forecast includes hardware, software, and PC and mobile games. The rise in smartphone and internet penetration has increased the demand for mobile games and online games, respectively. The industry as a whole is trying to match customer expectations. In this article, I discuss three companies that are keeping pace with the changes and have good future growth prospects.

Major releases and penetration in the Chinese market

Electronic Arts (NASDAQ:EA) stock has given a return of 88.9% YTD against NASDAQ's 23.7%. The company's last quarter revenue and EPS of $495 million and -$0.40 respectively were better than consensus estimates. I believe the company is a good bet because its digital and mobile games are showing good traction.

The company is going to launch FIFA Online 3 for the Chinese market with Tencent as its distribution partner. This will help Electronic Arts expand its addressable market, where it could not penetrate previously because of piracy. The Chinese gaming market is huge and has tremendous potential. So, if successful, this entry will act as a catalyst for the company's stock.

The company also is expected to launch a next-generation console in the upcoming holiday season. Management expects small incremental revenue for FY14 from PS4 and XBO, but I believe a blockbuster launch is possible later this year and the company can surprise on the upside.

Electronic Art's stock is trading at a forward P/E of 18.04. I am bullish on the stock and believe it can surprise on the upside.

Launch of new games and expansion in web and mobile gaming

Giant Interactive Group's (NYSE:GA) stock has given a return of 43.49% this year. The company has been diversifying its position in the MMO game market. Currently, the company's MMO game portfolio principally consists of the ZT series. The company is trying to make games outside the MMO game market, which augurs well for the future of the company. The margin outlook for the company looks solid. We expect the margins will improve slightly from the current operating margin of 65.9%.

In May 2013, the company launched its new game, "World of Xianxia." The game attracted more than 100,000 gamers on the very first day of its launch. Analysts expect the game to generate ~$13 million this financial year and ~$75 million in the next financial year.

Giant Interactive has a target of launching one big title every year. For this, the company has invested heavily in its R&D efforts. I think this strategy will help the company retain and gain more traction for its games. The company has also been exploring opportunities in web and mobile gaming. Recently it launched a new web game, "The Sky," and began testing it on the Qihoo (NYSE:QIHU) platform. After the initial success, the company has expanded the game on other channels.

The company's stock is trading at a forward P/E 7.72 and PEG ratio of 0.62. The stock looks undervalued to me given the future prospects of the company. I believe that the company will give a good return in the near future.

Expected success of GTA-V and diversification

Take-Two Interactive Software (NASDAQ:TTWO) posted strong first quarter results, beating the consensus estimate. The company reported revenue and EPS of $144 million and -$0.52 respectively, against the consensus of $131 Million and -0.58, due to higher-than-expected digital sales. The year-to-date return on the stock is 63.88%, against NASDAQ's 23.42%. The company is launching its much-awaited game "Grand Theft Auto V" (GTA) in September, which I believe will drive its sales going forward.

The company also is increasing its exposure to mobile and PC platforms, which I expect will further improve its digital revenue and margins. Take Two has made tremendous progress in diversifying the non-GTA business, along with growing a meaningful digital business. While their core title has been performing well, the diversification will add new customers to its kitty.

The company's stock is trading at a forward P/E 17.53 and has a PEG ratio of 0.66. I think it is undervalued when compared to its peers. With a strong upcoming release and an expansion in the mobile arena, there is tremendous potential for this company to grow.

Conclusion

Electronic Arts has made inroads in the high demand market of China. This, along with the new releases lined up for the launch in the upcoming holiday season, will help it post strong revenue and margin going forward. Giant Interactive has been spending heavily in new games and also has entered the web gaming space. The company, going forward, is all set to reap the benefits of its R&D investments. Take-Two has a big launch on card for September, which I expect will be a huge success. In addition, its diversification will add new customers to its kitty. Hence, I am bullish on all the three companies.

Source: 3 Outperforming Gaming Companies For Your Portfolio