Ubisoft: The Video Game Company I'm Adding To My Portfolio In 2014

Jan. 1.14 | About: UbiSoft Entertainment (UBSFY)

Last year, video game maker Take Two made my top ten stock picks for 2013. The stock was a top performer and one of the best video game related stocks in the market for 2013. While no video game stocks are going to make my top ten stock picks for 2014, there is one company I will be buying in 2014 for a short term and long term approach. Ubisoft (OTCPK:UBSFY), which trades in Paris and on the OTC in America offers investors upside with an exciting 2014 lineup and a newly created movie and television studio.

The 2014 lineup of games is centered around Watch Dogs and Assassin's Creed. Here is a look at current upcoming 2014 games:

· South Park: The Stick of Truth (March)

· Rayman Legends (February)

· Assassin's Creed Liberation (N/A)

· Might & Magic X: Legacy (Holiday)

· The Crew (N/A)

· Watch Dogs (N/A)

Several of these titles appear on VGChartz's list of top pre-ordered games (as of 12/14):

· 1. Watch Dogs (Playstation 4) 203,344

· 7. Watch Dogs (NASDAQ:XONE) 128,108

· 9. South Park: The Stick of Truth (X360) 100,690

· 12. South Park: The Stick of Truth (Playstation 3) 87,611

· 13. Watch Dogs (X360) 83,750

· 16. Watch Dogs (Playstation 3) 76,857

· 27. Watch Dogs (PC) 38,353

· 32. The Crew (Playstation 4) 34,331

While, only Assassin's Creed Liberation is set to be released in 2014, a rumor is popping up that two separate games will be released. One will be for the older consoles (Playstation 3, XBOX 360) and one will be for the new consoles (Playstation 4, XOne). This will allow the company to focus on gamers with varying expectations and allow gameplay to have less glitches or lack of consistencies across platforms. The franchise is an extremely important one to Ubisoft. The games in the Assassin's Creed franchise have sold over 53.5 million copies worldwide. Assassin's Creed III sold over 10 million copies for the main Playstation 3 and XBOX 360 consoles.

Watch Dogs, on the other hand, is a potential franchise creator for Ubisoft that could pave the future. The game is highly anticipated and has been the star of several video game conventions. The company is projecting sales of the game in the 6 million range, which would provide a nice boost to 2014 revenue.

Another area of potential growth for Ubisoft is mobile gaming. The company has long depended on the success of hit games for consoles, but has put an emphasis on mobile and social games via several acquisitions. On October 1st, the company acquired Future Games. The profitable mobile game company is behind the hit Hungry Shark series. Hungry Shark Evolution, the fourth instalment in the franchise, has been downloaded over 20 million times. The company has recorded over 100 million total downloads. Ubisoft has seen some success with its transition to the Assassin's Creed brand to mobile. The current Assassin's Creed Pirates game is the company's latest attempt to further monetize the franchise.

The long term picture for Ubisoft centers around movies and television. The company founded Ubisoft Motion Pictures in May of 2011. The company will be responsible for monetizing the characters in the video game company's franchise through other mediums. Here is a look at current games being developed into movies:

· Assassin's Creed (2015, 20th Century Fox and New Regency)

· Splinter Cell (TBA, New Regency and Thunder Road)

· Watch Dogs (TBA, Columbia Pictures and New Regency)

· Ghost Recon (TBA, Warner Brothers and Platinum Dunes)

· Rabbids (TBA)

· Far Cry (TBA)

The two biggest products in the movie category appear to be adaptations of Assassin's Creed and Splinter Cell. Currently, Assassin's Creed has Michael Fassbender set as the star and a producer. The movie is set to be released in the fall of 2015, after previously having a Memorial Day weekend scheduled release. Splinter Cell has "The Dark Knight Rises" star Tom Hardy set to start and serve as a producer. The Ghost Recon franchise is also rumored to be turned into a Michael Bay franchise for Warner Brothers.

Along with movies, Ubisoft is also working on television and recently launched its first series with "Rabbids Invasion". The show airs on Nickelodeon and has already been renewed for a second season. Twenty eight episodes have aired since August of 2013, with another 24 set to air for the first full season. The show's second season will begin airing in the middle of 2014. Rabbids is an extension of the Rayman franchise owned by Ubisoft.

To me, the move into motion pictures is similar to what Hasbro did with turning its brands into entertainment assets. Hasbro has had success with the Transformers movie line, but also failures like Battleship. However, by partnering with movie studios to help share the costs, Hasbro has seen film and television as a nice revenue booster for the company. Obviously there have been some disastrous video game movie adaptations by other studios recently, but Ubisoft has a strong following in the United States and international markets. With stars attached to help oversee the movie adaptations, film buzz should continue to pick-up. "Prince of Persia" made less than $100 million in domestic box office revenue, but strong international revenue took the movie over $330 million in worldwide box office. In fact, only "Lara Croft: Tomb Raider" in 2001 has grossed more than $100 million in domestic markets as a video game big screen adaptation. Ubisoft will face an uphill battle, but I believe they have the right names attached to make this happen.

Shares of Ubisoft have taken a hit after changing the release dates for Watch Dogs and The Crew, including a 20% pre-market drop after the announcement. Sales in the first half of 2013-2014 were up, but the operating loss increased. The sales were powered by strong back catalog sales (+16%) and digital sales (+29%). The company saw its market share drop slightly, but it maintained its number four position for independent video game publishers in the United States. US share dropped to 5.4% (from 6.4%). In Europe, the company increased its market share to 7.2% (vs. 6.9%), but dropped down to number four, from the prior year's number three market share position.

In the first half of the 2013 fiscal year, the company saw sales slanted towards Europe (40%) and North America (50%), with the Rest of World region making up only 10%. By console, Ubisoft was split pretty even in the first half of the year, with X360 leading with 29% of sales, and Playstation 3 (24%) and Wii (24% Wii and WiiU) following close behind. PC made up 17% in the first half of the year, while the other category, which includes mobile, made up 4% of total sales.

The company is projecting a net loss for the current fiscal year, but sees strong results coming in 2014 and 2015, thanks to a nice game lineup and strong digital sales. I believe the company is not yet pricing in or guiding sales and operating income based on movies or television yet.

Investors are better suited to buy shares of Ubisoft via the Paris Stock Exchange, where the company currently has a market capitalization of over $1 billion. Average volume is 600,000 shares per day. In the United States, on the OTC, only 10,000 shares of Ubisoft trade hands on a daily basis. The company also has a market capitalization of $1.4 billion, giving investors a slight premium to buy this video game maker. Shares of Ubisoft have only traded in the United States since 2010, where they remain near flat since that time. In Paris, shares traded for three times what they do now back in parts of 2008 and 2009.

While I don't think shares of Ubisoft will triple in the next couple of years, they do offer significant upside. The company has great brands and like my Take Two pick, has the potential huge impact of one blockbuster busting out the stock. The addition of mobile games and movies adds to the upside and is not being fully factored in by investors. If there is one video game stock for investors to buy in 2014, Ubisoft is the pick.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UBSFY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.