Editor's note: We run a special Digest series over the holidays each year...

It's a way for readers to revisit some of the best work we published over the previous 12 months... And it allows the Digest team to enjoy a few days off with friends and family.

This year, we're republishing issues from six of our most popular investment advisories. Normally, you can only access this content if you're a "paid-up subscriber" to these services.

But in the spirit of the holidays, we're sharing these essays in the Digest...

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(In the meantime, if you're looking for the updates on the movement of the markets this week, we encourage you to follow along with our friends at the Stansberry NewsWire.)

Today, we're kicking off our 2019 holiday series with Stansberry's Investment Advisory. In this essay – originally published in June – lead analyst Alan Gula details the latest changes in the fast-paced video-game industry, and explains the top way to profit from this trend...

Let's Profit as the Battle Royale Moves to the Cloud

By Alan Gula, lead analyst, Stansberry's Investment Advisory

He was about to make $1 million in one day... playing a video game.

His over-the-ear headset sat atop his unruly bright pink hair. A small fridge chilled Red Bull energy drinks on the desk next to him in the dimly lit gaming room.

Tyler Blevins, who goes by the alias "Ninja" online, sat in a chair emblazoned with his personal logo... complete with spiked hair.

"I'm going in," Blevins exclaimed into the microphone.

This was the first time he was playing Apex Legends, a new game developed by Respawn Entertainment. Apex Legends is a "battle royale" format... It's a multiplayer survival game in which competitors try to eliminate opponents to become the last man, or team, standing.

Blevins is no stranger to this type of game...

He began his professional gaming career in 2009 at the age of 18. He entered tournaments for Halo 3, a futuristic, multiplayer "first-person shooter" game. Blevins was a skilled player and his teams cracked the top 10 in various tournaments in 2011.

The following year, Blevins' team won a Halo 4 tournament. He and his three teammates split the first-place prize of $20,000.

He went on to play other games competitively. But Blevins became one of the most popular – and highest-earning – gamers in the world by streaming Fortnite, a game that rose to prominence in 2017 when its free-to-play battle royale version came out. Blevins has said that he plays Fortnite about 10 to 12 hours a day. It's no wonder he's so good at it...

Blevins previously broadcasted his Fortnite matches on Twitch, a livestreaming video platform. Users who logged on to Twitch could see what he saw as he played the game.

And they could see and hear Blevins, who had a camera and a microphone on him. A small window in the corner of the screen showed Blevins (and his crazy hair) as he battled his opponents in the virtual world.

Blevins' colorful commentary and personality are key parts of his success.

He has played Fortnite with celebrities, such as the rapper Drake. As a result, Blevins had amassed 14 million followers on Twitch before leaving for another streaming platform earlier this year. And the more viewers, the more advertising revenue for the streamer. Blevins was making $500,000 or more per month streaming his conquests on Twitch.

Blevins is a celebrity in the gaming world. And that's why Respawn signed him as a partner for the Apex Legends launch.

In early February, Respawn and its parent company released Apex Legends without any prior warning. A week before the launch, no one outside of the companies even knew that the game existed. The companies planned no grandiose promotions ahead of release and booked no preorders. Instead, the surprise launch centered on an ingenious strategy involving Blevins and other streamers.

Respawn's parent company reportedly paid Blevins $1 million to try the game out and stream his experience on Twitch.

Blevins was joined by Timothy "TimTheTatman" Betar, who was also paid to play Apex Legends that day. As Blevins played the game for the first time, he commented to Tim, "Remember, we went back and watched the first time I played Fortnite... This is how I feel right now."

Blevins and Betar both picked up the game incredibly quickly – as you would expect from seasoned gamers. Before long, they were defending positions and coordinating attacks, all while the action streamed on Twitch.

"This is an incredible game. I'm having so much fun," Blevins remarked.

The pair played for about six hours. And the buzz generated by the streamers helped to attract hordes of players. Within just three days of its release, Apex Legends had 10 million players. By comparison, it took Fortnite two weeks to reach that milestone.

The surprise launch worked perfectly... Within a month, Apex Legends had 50 million players.

You may never have played Apex Legends or Fortnite... or any video game. But you probably know someone who does. More than 160 million Americans play video games. And the average age of a U.S. gamer is around 35... This isn't just kids' stuff.

Worldwide, an estimated 2.4 billion people play video games. That's nearly one-third of the global population.

Obviously, a market this huge (and growing this fast) creates investment opportunities. Not only that, but video-game publishers also have enviable, capital-efficient businesses.

So today, we're recommending Respawn's parent company, Electronic Arts (Nasdaq: EA).

It's one of the top video-game publishers in the world. It owns long-established game franchises whose adoring fans buy their new releases every year. And with its purchase of Respawn in late 2017, it now owns one of the hottest new games around. Respawn has other games in the works that we're excited about as well.

Gaming has a bright future and our pick is well-positioned to take advantage of the trends in this fast-paced industry.

Video Gaming Grows Up

Twitch is helping to transform video gaming into a spectator sport...

Viewers watched more than 9 million hours of content on Twitch last year – nearly 60% more than in 2017. And the vast majority of that content was video-game streaming.

E-commerce giant Amazon (AMZN) bought Twitch in 2014 for nearly $1 billion. That was a steal, considering the platform's growth over the past few years.

Twitch is also fueling the rise of organized, competitive video gaming (or "esports").

Esport tournaments are attracting mammoth audiences. The 2018 Mid-Season Invitational, an esport tournament featuring the game League of Legends, had around 60 million unique viewers. The 2017 Intel Extreme Masters tournament, which featured a number of games, had around 46 million unique viewers.

As the interest and viewership in esports tournaments grow, so do the prize pools...

Overwatch is a team-based, first-person shooter game owned by Activision Blizzard (ATVI). Since Overwatch's launch in 2016, there have been 727 tournaments with a combined prize pool of more than $21 million. There's even an official Overwatch league. Its first season finished in the summer of 2018 and had a playoff tournament first-place prize of $1 million.

The esports movement is exciting for professional gamers and streamers, and bodes well for the future of gaming. Esports are grabbing a lot of attention as high-profile billionaires, entertainers, and athletes like Mark Cuban, Sean "P. Diddy" Combs, and Michael Jordan have invested in esports teams and leagues.

But despite its torrid growth, esports still represents a small facet of the overall video-game industry.

The global video-game market was around $135 billion last year. And it is forecast to grow to nearly $175 billion by 2021. That's about a 9% compound annual growth rate.

We've been following this trend in Stansberry's Investment Advisory for years... Back in 2011, we recognized the huge potential in the video-game industry and recommended Activision Blizzard, whose popular franchises include the military combat game Call of Duty.

We closed the position for a 129% gain in early 2016 after the stock hit our trailing stop. We wish we'd held on... We would have been up more than 500% in mid-2018.

We're not re-recommending Activision Blizzard today. It's still a solid company, but it has been hit by a setback. Earlier this year, the company ended its partnership with development studio Bungie. Bungie will take with it the popular game franchise Destiny. That alone could cost Activision Blizzard around $200 million to $300 million in annual revenue. More important, Activision Blizzard is losing a creative partner.

Activision Blizzard will be fine in the long term. But we believe that competitor Electronic Arts is better positioned right now to capitalize on the growth in the video-game market.

Gaming Goes Fully Digital

Back in 2011, we explained why we liked video-game publishers:

Technology will also allow these publishers to adopt higher-margin distribution models, where players are able to pay the publisher directly, buying the game through subscription, instead of through a retail outlet. These trends are why I'm extremely bullish on the long-term future of the video-game business.

That's exactly how things have played out. Physical media is giving way to digital downloads. Game discs and cartridges are becoming obsolete. You no longer have to drive to the store to buy games... or have them shipped. You can do it all at home, directly over the Internet.

The slow demise of video-game retailer GameStop (GME) – another call we made in 2014 – best illustrates the trend.

Since late 2011, Activision Blizzard's stock has produced a total return (dividends reinvested) of nearly 400%. EA is up around 325% since then. Meanwhile, GameStop is down 68%.

We shorted GameStop in May 2014 when shares traded for around $39. Even though we stopped out a few months later, our call proved correct. The stock trades around $6 a share today, and the company suspended its dividend in June.

In May, tech giant Microsoft (MSFT) began selling an "all digital" version of its Xbox One S console. This new version doesn't have a disc drive. It only supports digital downloads. Users must purchase and download all of its games electronically.

Microsoft still sells an Xbox with a disc drive. And you can still buy games for personal computers (PCs) on discs. But the future of the industry is digital.

Back in 2011, EA's "packaged games" accounted for nearly 80% of the company's revenues. This includes games sold to mass-market retailers and specialty stores like GameStop.

As you can see in the chart below, physical discs and digital delivery have flip-flopped in importance over the past decade. In EA's latest fiscal year (ended March 31, 2019), nearly 75% of the company's $5 billion of sales came from subscriptions and digital downloads.

Within the next five years, digital delivery should account for almost all of EA's sales.

You can buy EA video games in many places, including the digital storefronts of Sony, Microsoft, and Nintendo. EA also has its own digital storefront, called Origin, for Mac and PC games. Origin has a premier digital subscription that costs $15 per month or $100 per year. Subscribers get access to 255 games as well as early access to upcoming releases.

The physical-to-digital shift in the video-game industry is well underway. But there's another important trend that's just taking shape: cloud gaming.

Cloud gaming is far more involved than just connecting players over the Internet. With cloud gaming, the vast majority of the processing and graphics rendering is performed by a global network of powerful servers. And all of the data are stored and managed remotely. That frees games from the limitations of your local hardware.

Thanks to cloud gaming, gamers don't have to buy powerful, expensive PCs to enjoy sophisticated and graphics-intensive games like they have in the past. And they won't have to periodically upgrade to the latest versions of the Sony PlayStation or Microsoft Xbox.

Some of the biggest names in tech are preparing for a cloud-gaming future...

Google's parent company Alphabet (GOOGL) launched a cloud-gaming service called Stadia in November.

Stadia is advertised as being capable of streaming high-definition 4K HDR video at 60 frames per second. And it doesn't require users to ever update or download new software. You can access the latest games from a Google Chrome browser with the click of a button. All you need is a high-bandwidth Internet connection with low latency (the communication delay between a sender and receiver in a network).

Microsoft also revealed that it's working on creating a streaming service called xCloud. It plans to launch the service sometime next year.

EA's cloud gaming initiative is called Project Atlas. It's a game-development platform optimized for cloud gaming. EA has said that it has more than 1,000 of its employees (more than 10% of its entire workforce) working on Atlas. So, it's safe to say that EA believes in cloud gaming and its potential to transform the industry.

For example, cloud gaming will allow future battle royale games to accommodate more gamers at the same time, feature bigger maps, and boast even more realistic graphics. And you'll be able to play on any device...

Thanks to Apex Legends, EA is now developing valuable intellectual property on the battle royale front...

A Studio With Huge Potential

EA bought Respawn in late 2017 for around $300 million. The deal also included another $140 million in performance-based incentives.

The acquisition was a brilliant move by EA, as the successful launch of Apex Legends shows.

To be clear, we don't think Apex Legends will be as big of a phenomenon as Fortnite. Because it incorporates tongue-in-cheek cartoonish elements and building activities, Fortnite is not strictly a combat game. That gives it greater mass appeal than Apex Legends. Fortnite, which is published by privately held Epic Games, had $2.4 billion in revenue last year. (Chinese tech giant Tencent owns 40% of Epic Games.)

However, Respawn's acquisition has far bigger implications than just one hit game. Respawn gives EA another creative engine for game innovation...

You see, Respawn was founded by Jason West and Vince Zampella. These guys are rock stars in the game-development community. Back in 2003, they created Call of Duty, which has become a huge franchise for Activision Blizzard.

Now, EA will benefit from the addition of these creative developers...

In December 2013, EA signed a deal with media and entertainment giant Disney (DIS). The agreement granted EA exclusive rights to produce games based on Star Wars. EA didn't do much with the Star Wars licensing deal for several years. Until recently, the publisher had released just two Star Wars Battlefront titles, which were lackluster.

But last month, Respawn released the next title in the series, a single-player game called Star Wars Jedi: Fallen Order. And it instantly gained a lot of attention... In a November 26 news release, EA noted that the game was "the fastest-selling digital launch for a Star Wars game in its first two weeks."

Ron Burke, the editor in chief for gaming-news website Gaming Trend said, "Star Wars Jedi: Fallen Order is an absolute masterpiece. Well-paced, written, and executed, the game is Respawn's best thus far."

Respawn is also working on another project... a virtual reality ("VR") game for the Facebook-owned Oculus platform. It's called Medal of Honor: Above and Beyond, and it's scheduled to release sometime in 2020.

Respawn CEO Vince Zampella described in an interview with VR trade magazine Upload how the technology is the next quantum leap in gaming:

The combat experience in VR really gives you the chance to experience life closer to what a soldier would experience in real combat.

Cloud gaming and VR are the future of the video-game industry. And EA has talented teams working on both technologies.

But EA has established, lucrative franchises that generate dependable sales and impressive cash flows year after year...

These World-Class Franchises Keep Raking in Cash

In 1982, Trip Hawkins left his role as director of strategy and marketing at Apple Computer to found EA. He later told Wired Magazine:

Most of my friends would tell you I started EA as an excuse to make a football game. And there's probably a fair amount of truth to that.

In the late 1980s, EA released John Madden Football. It ran slowly because of the limitations of the computers back then. Most PCs didn't have enough memory and couldn't produce enough pixels for good resolution. But it was a revolutionary game. It allowed you to design your own plays. You could pick a formation and then assign passing routes and blocking schemes as you saw fit. The game basically let you pretend you were Hall of Fame coach John Madden.

The game franchise – known simply as "Madden" to its fans – has turned into one of the most prolific in industry history. Each year, EA creates a more realistic game with updated players and rosters. And each year, millions of fans rush out to buy the game. In August, EA released its latest edition: Madden NFL 20. The Madden franchise has surpassed 130 million units in sales over its history.

Despite the success of Madden NFL, the crown jewel of EA's sports franchises is its soccer game...

In 1993, EA released the first FIFA video game. EA has a license agreement with soccer's worldwide governing body that gives the company the exclusive rights to produce FIFA-branded video games.

Each new version of EA's FIFA game is at or near the top of the list of that year's best-selling games. Last year alone, more than 45 million unique users played FIFA games on PlayStation, Xbox, and PC. The FIFA franchise accounted for around 14% of EA's net revenue last year.

Rounding out EA's sports franchises are the NBA Live basketball and NHL hockey games.

EA also publishes The Sims, a series of life-simulation video games that let you create virtual people, pets, and houses. It's one of the best-selling franchises of all time. The Sims was inducted into the World Video Game Hall of Fame in 2016.

A Model of Capital Efficiency

To create new games and update its popular franchises, EA spends a lot on research and development (R&D).

Last year, the company spent about $1.4 billion on R&D. That was the equivalent of nearly 30% of EA's revenues. By comparison, Alphabet only spent the equivalent of 16% of its revenues on R&D. Microsoft spent less than 14%.

Despite its significant R&D expenses, EA is highly profitable.

As we've shown, EA's games are increasingly delivered electronically. This benefits EA because it eliminates the retail middlemen. That's why EA's gross margins – its revenues minus the direct costs of producing video games divided by revenues – improved from 62% five years ago to 73% last year. And they'll improve even further as the shift to digital delivery progresses.

After subtracting all costs, including R&D and sales and marketing, EA has operating margins that range from around 20% to 30%. The median operating margin in the S&P 500 Index is about 16%.

As we've said before, producing software is a highly scalable, capital-efficient business. It doesn't require a lot of large business investments (capital expenditures or "capex"). EA doesn't need to build factories or maintain expensive industrial equipment.

As a result, EA generates a lot of free cash flow (FCF), which is the amount of cash left over after all expenses and capex. Last fiscal year, EA produced $1.4 billion in FCF. That was the equivalent of about 29% of revenue – this percentage is known as "FCF margin."

EA's FCF margins have averaged 30% the past three years. In other words, for every dollar of sales, EA is effectively left with about $0.30 of FCF.

By comparison, the median FCF margin in the S&P 500 (excluding financials) is around 10%. EA's FCF margin is about three times as wide as that of a typical large-cap company.

EA has a wider FCF margin than its large-cap U.S. competitors: Activision Blizzard and Take-Two Interactive Software (TTWO). But even EA's peers have far wider FCF margins than the typical company. The table below shows how attractive margins are in the game-publishing business. (The table also includes the valuation metric FCF yield, which we'll discuss in a moment.)

With its impressive FCF, EA management has the luxury of being able to return lots of capital to shareholders.

EA doesn't pay a dividend. But it does repurchase stock.

In May 2018, EA's board of directors authorized the repurchase of up to $2.4 billion of its common stock. Through this past March, the company had bought back $1.1 billion under this program.

Strong FCF also lets EA make strategic acquisitions – like its purchase of Respawn – without issuing a lot of debt. EA has about $1.3 billion in debt outstanding. But the company has nearly $4.9 billion in cash and short-term investments. Therefore, EA has a net cash (cash minus debt) position of around $3.6 billion.

With these impressive numbers, you might think EA's stock is expensive today. It's not. The company had a string of disappointing earnings releases recently. Wall Street's expectations were way too high for even a business as good as EA.

Regardless, the stock is still down more than 25% from its all-time high in July 2018.

This gives us an opportunity to buy the shares at a relatively cheap valuation.

You can think of FCF yield sort of like dividend yield. But rather than the dividend divided by stock price, FCF yield is FCF divided by market cap. The higher the FCF yield, the cheaper the shares are.

EA's FCF yield got down to around 3.4% in mid-2018. But now, its FCF yield is up around 5.1%. That's higher than the median FCF yield in the S&P 500 of 3.9%.

EA doesn't deserve a valuation that's cheaper than the overall market. It has a fabulous, capital-efficient business with world-class video-game franchises. And with the addition of Respawn, the company has another growth engine. EA is also poised to shine as the video-game industry rolls out cloud and VR gaming to the masses in the years ahead.

Buy Electronic Arts (Nasdaq: EA) up to $105 per share. Use a hard stop loss at $75 once you've established a position. (Please note: EA shares currently trade at about $108 per share, slightly above our recommended buy-up-to price.)

Regards,

Alan Gula

Editor's note: As part of our special holiday series, we're offering Digest readers a significant discount off the normal cost of some of our most popular research. This week, you can try Stansberry's Investment Advisory – which comes with our standard, 100% no-risk guarantee – for 75% off the usual subscription cost. Click here to get started.