4 Stocks to Profit From New Gaming Consoles

The Sony PlayStation 4 or PS4 is out and selling much better than anticipated. As a result, investors are searching for the best ways to play the systems' success. While many ideas have been presented, I see four options that could be very rewarding.

Option 1: Buy the system maker
Of course the most obvious way to benefit from strong sales of PS4 is to invest in Sony, which is the manufacturer of the console. In the first 24 hours, sales of PS4 topped one-million units.  With each unit selling for $399 and techinsights.com estimating costs around $296, Sony stands to earn a fairly decent profit margin, even after third-party profits.

Hence, if Sony profits $50 per unit, then its margin would be roughly 12.5%, possibly higher. With Sony's trailing 12-month operating margins being just 0.48%, the success of PS4 not only implies growth but operational improvements. Thus, investing in Sony is a clear way to profit on the success of the game console.

Option 2: Components
In techinsights.com's breakdown of the PS4's components, we find $85 has been spent on processors. The company's central processing unit was co-developed by Sony and Advanced Micro Devices .

If we look at AMD, the company has annual sales of $4.86 billion, an operating margin of negative 6.75%, and a business that continues to lose market share to Intel in the computing space. AMD has performed well in recent quarters as it relates to consoles, and could see continued success with the success of PS4.

If AMD receives a 50/50 share of processor revenue, then PS4's success could be a significant long-term growth driver. The problem is that we don't know other costs that might be included as "processors" or its revenue-share. For example, Marvell Technology's Ethernet controller is used as part of the processor, meaning AMD's share could be significantly less than 50% of the $85 spent on each unit's processor. Hence, it could be just $5 per unit.

Historically, trying to predict the success of suppliers has been difficult at best. There are a lot of unknowns, but with AMD trading at just 0.5 times sales, it might be worth a look.

Option 3: Retailers
While investing in Sony or suppliers is an obvious choice, why not invest in the companies that sell the devices?

Initially, the most obvious of selections might seem like Best Buy or Wal-Mart. However, these are massive companies that are not fundamentally driven by the success or failure of any single product. Instead, why not look into a business like GameStop ?

GameStop sells game consoles but more importantly video games. The company will directly benefit from units sold, but will also reap the benefits as video games are developed over the next 12 months. Moreover, this brings up another point: The launch of Microsoft's Xbox One this Friday.

The PlayStation and Xbox series has been the best-selling consoles of the last decade, and with PS4's success, one has to believe that Xbox One will also perform well this holiday season. This fact benefits the likes of GameStop, as increased consumer demand for multiple consoles and video games directly impacts its business. Then, when you consider its valuation, trading at 0.77 times sales and 14 times next year's earnings, the future could be bright for GameStop.

Option 4: Video Game Developers
While I have already touched on the impact of video game development, investors must note that developers also stand to benefit. In particular, Electronic Arts is a stock to watch.

The game-developer industry has undergone massive changes over the last decade. Most notably, there have been several years between the release of updated Xbox and PlayStation lines -- seven years -- and during that period we've seen growth in mobile gaming.

Electronic Arts, Activision Blizzard, and others have had to innovate with these changes, but still own several best-selling game franchises that could see accelerated growth amid the release of new consoles. In particular, Electronic Arts develops blockbuster games such as Madden, FIFA, and Battlefield. The release of new consoles might boost sales of these games, and lead to the rapid development, and early release, of new and existing franchises.

While Electronic Arts is rather pricey at 33 times earnings, the stock could add to its year-to-date 66% gains if the launch of Xbox One is equally or nearly as impressive as PS4.

Which is the best option?
Clearly, there are a lot of ways to play the success of PS4, and prepare for the launch of Xbox One. In an attempt to seek the absolute best-value with the least amount of risk, I think GameStop might be the way to play the console war. For component companies such as AMD, it's always hard to determine exactly how much it profits per unit, and with this unknown, comes a lot of risk.

PS4 sales are surging, but what happens when Xbox One is released? Will Xbox One simply attract new consumers or will Sony have to share current consumers? This uncertainty makes owning Sony a bit of a risk.

While Electronic Arts will benefit from two new consoles, it is pricey, and investors must wonder how much upside exists, and if the company sacrifices margins to create games faster.

This leaves GameStop, a company with nothing to lose, and everything to gain from the consumer excitement, aggressive marketing, and rapid game development that comes with two new consoles. The company trades at a very cheap multiple to earnings and with rapid same-store-sales growth, GameStop's profits could soar, thus pushing shares higher.

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The article 4 Stocks to Profit From New Gaming Consoles originally appeared on Fool.com.

Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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