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This Stock Is A Secret Way to Invest in Video Games

Investing in the electronic game industry is similar to playing electronic games: you're going to need a microprocessor, according to Dan Niles, Senior Portfolio Manager at Alpha One Capital Partners.

The chip maker Niles believes can best capture the game market is Advanced Micro Devices (AMD).

Revenue for the company has been volatile. AMD's most recent quarter showed a 31% drop in revenues. Annual revenues also had it tough in 2012, down 17% from 2011.

Here's where Niles thinks there's an upside: While he expects the company's chip sales to PC makers will slip, he estimates that by 2015, 20% of its revenues will come from its sales to Sony PlayStation 4 and Microsoft's Xbox One.

That's why Niles thinks Wall Street has it wrong. Consensus has AMD's revenues in 2015 at $5.4 billion, but Niles believes the company will see $7 billion due to increased chip demand from game console makers Sony and Microsoft.

Yet for those who like the emotional ups and downs of video games, previous investments in AMD matched anything game makers are putting out this week at The Electronic Entertainment Expo (E3).

Since the mid-1990s, share prices went from $6.875 to $19.625 to $6.375 to $48.50 to $13.56 to $31.79 to $3.10 to $42.46 to $1.62 to $4.06. If you need a neck brace after reading that, just imagine what investors had to go through.

The measurement that puts that price movement in perspective is annualized volatility. It gives a sense of how much the stock's return varies from its average return in a given year. Annualized volatility is the standard deviation of a stock's daily return on an annualized basis. A large standard deviation means that, if one were to graph daily returns, the data points would be spread out wider than if the standard deviation were smaller.

For AMD, the annualized volatility was 70% for 10 years starting in September 1999. The benchmark S&P 500 had an annualized volatility of 22% this same period. How does that measure against everyone's favorite tech stock, Apple? Apple's annualized volatility during the same time was 52%. However, Apple's overall returns went up over 825% that decade while AMD was down nearly 57%. Even since September 2009, AMD's annualized volatility has been 54%. Not as high as it was before but still pretty high.

So, given its volatility, is Niles' thesis that an investment in AMD a good way to play the video game makers correct?

We asked Talking Numbers contributor Enis Taner, Global Macro Editor at RiskReversal.com, to look at the charts.

To hear the reasons Niles believes AMD is a stealth way to invest in video gaming and to hear Taner's analysis of AMD's charts, watch the video above.

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