Thanks to two huge product rollouts in November, this holiday season will be one of the hottest ever for this massive slice of the high-tech sector.
That's because three giant companies are fighting it out – to the death – for the biggest piece of a $93 billion windfall.
And investors who identify the winner of this battle stand to pull down a hefty profit.
Today, I'm going to show you which firm will come out on top.
We Won't Be Playing Games
Because it gets so hot during the holiday shopping season, folks tend to think of videogaming as a consumer product. But it's actually one of the backbones of the high-tech sector, driving development of semiconductors, displays, software, sensors, controllers, and other key elements of technology devices.
But this year is shaping up to be special.
Consider that the respected market researcher Gartner says the global videogame market will hit $93 billion this year, up nearly 18% from the $79 billion last year.
And there's still more growth ahead: Gartner is forecasting another 19% increase by 2015 when the sector will reach $111 billion in sales.
That works out to a four-year sales gain of 40%.
Those figures include sales of mobile and PC games, software titles, and video consoles. This last category still ranks as the largest segment of the market with projected 2013 sales of $44.3 billion – or roughly half the entire industry.
Before we can tell you about the one stock that will put the biggest punch into your portfolio, we need to tell you about the three console makers… identifying the winners and losers.
We'll take them one at a time…
Nintendo Looks to the Past
When the first-generation Wii gaming console from Nintendo Co. Ltd. (ADR) (OTC: NTDOY) debuted for the holiday season in 2006, it was a true game-changer. I know this from personal experience: My wife was one of the first people in the United States to try it out.
To appeal to a mainstream audience, Nintendo made a brilliant marketing move. It invited moms to live demonstration parties and pitched it as a game console that would bring the family together.
My wife and her friends went to one of the parties. Several bought the breakthrough console – our family included.
The original Wii was such a huge hit because it gave consumers their first real look at the (very) cool things that were made possible by motion-sensor technology.
You see, the sensors embedded in the Wii's hand-held remotes allowed users to play tennis, baseball, golf, and even bowling in a fairly realistic manner.
Industry analysts still rank the Wii as one of the more successful game platforms in recent history. Nintendo says it has sold more than 100 million of the original Wiis to date.
Unfortunately for Nintendo, its follow-up offering – the year-old Wii U – isn't doing anywhere near as well.
And sales coming into this year's holiday-shopping sales to date actually stink: Nintendo originally forecast sales of 5.5 million consoles in the fiscal year ending March 31, 2013, but missed by more than 35% with sales of 3.45 million units.
No doubt, the game suffers from a lack of simplicity. The U includes a tablet-like controller that some consumers found confusing to use after the elegant simplicity of the original Wii.
Back in June, Nintendo CEO Satoru Iwata told CNBC that the dismal launch was due to a lack of good software titles for the device, admitting that "we are to blame."
Nintendo is trying to become more competitive this Christmas by releasing more than a dozen new game titles. It's also hoping that the buzz the industry is getting during the holiday shopping season could also spell increased sales for the Wii U.
And given the sold-out status of the next two consoles, gamers desperate to play something, anything, mean that a rebound is entirely possible …
Sony's Bidding Frenzy
You know you have a breakout hit on your hands when the gaming console's release is so eagerly awaited that sharp eBay sellers are putting up pre-rollout bids that are 60% higher than the manufacturer's suggested retail price (MSRP).
That's precisely the reception that Sony Corporation (ADR) (NYSE: SNE) had hoped for – and got – with the Nov. 15 launch of the PlayStation 4, known among its fans as the PS4.
Then again, this was the first new PlayStation release in seven years – an eternity in the fast-paced gaming world. The eBay bidding frenzy before the official release of the $399 device underscores a dynamic that most investors may not understand.
Turns out, the belief that video games are largely for teenage boys… is a myth. The Entertainment Software Association - the trade group that oversees that slice of the gaming business – says the average age of a gamer is 35. One-fourth of all gamers are older than 50, the group says.
With that kind of discretionary buying power, gamers made the PS4 an instant hit.
Sony says it sold 1 million PS4s in the first 24 hours they were available here in North America.
That was five times the 200,000 PS3s that Sony sold on its opening sales day back in 2006.
And that was just the start…
At the end of the game's first week of sales, electronics retailer Best Buy Co. Inc. (NYSE: BBY) revealed that its entire supply of PS4s was almost gone.
To impress hardcore gamers, Sony upgraded the new console with faster speeds, better memory, and dazzling graphics. Sony also released the PS4 alongside nearly two dozen gaming titles.
Sony says it expects to sell some 3 million PS4s worldwide by the end of the year. But those figures won't include sales in its native Japan, where Sony won't begin selling the device until late February.
As the pre-introduction bidding hinted – and the opening week sales landslide confirmed – Sony has a hit on its hands.
And it's not alone…
Mr. Softy Flexes Real Muscle
Not to be outdone in the gaming wars, Microsoft Corporation (Nasdaq: MSFT) announced a first-day record with 1 million new Xbox One consoles sold in the first 24 hours of its availability.
No doubt some observers will say that Microsoft benefited from its broader global reach. The Xbox One was available in a total of 13 countries, while the PS4 was only introduced in North America.
But consider this: The first new Xbox in eight years basically sold out in its first day on the market. The truth is, Xbox One units were unavailable at both retail stores and online.
So, there's no telling just how many units Microsoft could have sold had it increased production before the official launch.
That's quite an accomplishment when you consider that Microsoft's new game console retails for $499 – $100 more than Sony's PlayStation 4.
But it's pulled off a marketing coup.
That's because, with Xbox One, Microsoft is offering some key features that appeal to hardcore gamers and mainstream buyers alike.
Of course, it also benefits from an update to the Xbox Kinect motion-and-voice-sensor that makes it easier to operate for the average user.
More to the point, Xbox One is central to Microsoft's vision of playing a bigger role in home entertainment. This updated version easily integrates with online video streaming from Netflix and Hulu.
And the Microsoft-owned Skype video calling service works with Kinect to allow facial recognition and automatic log-ins.
In other words, it's conceivable for someone to buy an Xbox One, and never play a single game on it.
As I see it, there's more at stake here for Microsoft than just coming up with a smash videogame success.
It shows that, despite its size and conservative approach, Microsoft can still muster a creative edge needed in today's fast-moving tech world.
Thus, Xbox One is a good catalyst for Microsoft at a critical time in the company's history.
And that makes Microsoft the one gaming stock you have to own – a potential big-gainer with limited downside risk.
Here's why …
CEO Steve Ballmer has announced his retirement in the next few months, and the company is searching for a new leader, deeply experienced in corporate restructuring.
That gives us two catalysts back to back that should spark a surge in Microsoft's stock, which already offers investors a heck of lot of value for just $37 a share.
Last year, Microsoft generated nearly $19 billion in free cash flow (FCF). With a market cap of $313 billion, the company's shares trade at less than 13 times forward earnings. That's a 30% discount from the S&P 500's forward price/earnings (P/E) ratio of 18.5.
Microsoft is one of those great "foundational plays" we've talked about in the past.
And with a stock like this you can win the one "financial game" that really matters – greatly improving your net worth.
Tech is the sector for the next hundred years, and Michael's high-tech investment research has brought his readers triple-digit gains. To get all of his Strategic Tech Investor briefings delivered free, twice weekly, enter your email address below.
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.