Gaming Stocks – How to invest in the esports and video games industry

The size and growth of the video games and esports industry had already taken many by surprise before the COVID-19 pandemic began. This growth has now accelerated even more as consumers look for new ways to entertain themselves while confined to their homes.

Between 2014 and 2019, the amount spent by gamers around the world grew from an estimated $84 billion to nearly $150 billion. Gaming spend was originally estimated to reach $159 billion in 2020 but is now expected top $174 billion. Of particular significance is the number of new gamers who have entered the market. In this post we break down the gaming and esports industry, the types of companies and the gaming stocks you can consider investing in.

• The video game industry
• Investing in gaming stocks
• Largest companies with exposure to video games and esports
• Pureplay gaming stocks
• Gaming hardware and peripherals

The video game industry

The very first form of video games emerged in the 1940s, though it wasn’t until the 1970s that the industry became commercially viable. An eager market quickly emerged for arcade games, and later for video game consoles. During the 1980s, video games and consoles were developed in parallel with advances in the personal computer. Prominent companies included Namco and Nintendo, but games were also created to be played on all the popular PCs at the time.

Development accelerated during the 1990s with the introduction of operating systems like Microsoft Windows, faster processing speeds, 3D graphics cards and the CD-ROM. Mobile games were also introduced soon after mobile devices were introduced. In 1995 Sony launched the PlayStation console. It was so successful that Microsoft viewed it as a threat to the PC market, prompting Microsoft to make a rare move into the hardware with the Xbox. Console games, PC games and mobile games have all seen steady growth since 2000.

Esports, in which teams of professional gamers compete against one another, has created new ways to monetize gaming and market games to consumers. Esports viewership is now projected to reach 646 million by 2023. Other recent trends include live streaming of games and cloud gaming.  Mobile gaming has also seen a surge in growth as the number of global consumers with smartphones has grown to 2.7 billion. Along with the growth of the industry, the number of listed gaming stocks around the world has grown. Investors now have a wide variety of stocks to choose from for exposure to the industry.

Investing in gaming stocks

When looking for video game stocks to buy there are a few things to bear in mind. The gaming industry is diverse, with several layers related to the development and distribution of games, as well as hardware, live streaming and esports. The implication for investors is that there are lots of different types of gaming stocks, and stocks are likely to perform at different times. New games can drive profits in the short term. But long-term sustainable growth is all about distribution, a pipeline of new games and franchises.

High quality gaming stocks are often subject to cycles. Sales are seasonal and are typically higher over the holiday season. Sport games are often upgraded at the beginning of a season to include new players which can also boost sales. New purchases also occur after new consoles are released. Long-term investors should look at gaming stocks with the potential to become multibagger stocks. These are the companies with the right culture and strategy to build a portfolio of valuable game franchises. Revenue cycles can then be used to invest at reasonable valuations.

Smaller gaming stocks often require a more active approach. These stocks typically perform well when a new game becomes popular but can crash when popularity wanes. A momentum-based approach is often more suitable for smaller gaming stocks. As adoption of 5G technology increases, cloud gaming is likely to grow in popularity. This will favor the tech companies adopting a SaaS type approach. This may mean that only the best of the pureplay gaming stocks will perform over the long term.

Largest companies with exposure to video games and esports

A lot of the best assets in the gaming industry are owned by the world’s largest technology companies. In fact, the seven largest tech companies in the world all have significant exposure to gaming. If you invest in these companies you will also have exposure to other industries – but gaming does remain a major growth driver.

• Tencent (US OTC: TSEHY, Frankfurt: NNND): Tencent is a company that few had heard of until a few years ago. One of the reasons for the $700 billion company’s success is the gaming empire it has built up over the years. Tencent has done this by acquiring smaller game developers and as well as stakes in gaming giants. Among these stakes are 40% of Epic Games (Fortnite’s publisher) and smaller stakes in Supercell, Activision Blizzard, and Ubisoft. Tencent also hosts massive multiplayer games like Call of Duty and League of Legends. In 2019, Tencent earned $17 billion, or 30% of its total revenue from gaming.
• Amazon (Nasdaq: AMZN): Amazon’s exposure to gaming takes two forms. Firstly, the marketplace is one of the world’s major distributers of games, consoles, and related products. Secondly, Amazon owns Twitch, the world’s largest live streaming service. Twitch is used by gamers to live stream their screens while playing, and to broadcast esports competitions. Amazon is now also developing its own games which will be available on Luna, a cloud gaming service. The platform is already available to a limited audience.
• Alphabet (Nasdaq: GOOG/GOOGL): Alphabet began earning revenue from gaming when the Google Play Store was launched. In 2019, Google launched Stadia, another cloud streaming platform, to compete directly with Apple’s Arcade. YouTube is also a major player in the live streaming market. While gaming accounts for a smaller percentage of revenue for Alphabet than the other companies listed here, it promises to be a major growth driver in the future.
• Sony Corporation (NYSE: SNE): Sony launched its iconic PlayStation 1, or PS1, in 1995 and immediately became the world leader in console-based games. In November, this year it launched the 5^th generation PS5, once again going head-to-head with the latest Xbox. Early sales data has shown Sony’s console once again outselling the Xbox by a large margin. Sony ranks second globally, behind Tencent, in overall gaming revenue. However, gaming revenue still only accounts for around 25% of overall sales. So, while gaming is an important growth driver, Sony is still not a pureplay gaming stock.
• Microsoft Corporation (Nasdaq: MSFT): Microsoft released the original Xbox in 2001, after witnessing the success of Sony’s PlayStation gaming console. In November this year, the 4th generation Xbox Series S and Xbox Series X were released. Sales of the Xbox have always lagged those of PlayStation. However, Xbox sales do contribute meaningfully to Microsoft’s bottom line and to revenue growth. In 2019, Xbox Game Pass Cloud Gaming, Microsoft’s cloud gaming solution was launched.
• Apple Inc (Nasdaq: AAPL): Apple’s gaming revenue previously came from the games sold on the App Store, as well as from in-game purchases. In 2019, Apple launched Apple Arcade, a subscription-based cloud gaming service. This approach is in line with the company’s strategy of diversifying into subscription-based services to compliment the hardware business. Arcade costs users $4.99 a month, and by the end of 2020 will give users access to over 100 games. The initial effect was a decline in App Store revenue from games. However, the company hopes that a portfolio of premium games will attract new customers to the ecosystem in the future.
• Facebook Inc (Nasdaq: FB): Facebook’s gaming revenue is diverse and difficult to quantify. Games, including those that can be played on mobile devices, have always been an important part of the content that keeps Facebook’s audience engaged. This in turn results in ad revenue growth. More recently, livestreaming of games has also become an important growth driver for the company.
• NetEase (Nasdaq: NTES, Hong Kong: 9999): NetEase is one of China’s tech giants and provides a range of online services including content, ecommerce, and communication services. Over the years NetEase has built a considerable online and video gaming empire. NetEase games including Xuan Yuan Sword, Astracraft, and Identity V are amongst the most popular in China, while Fantasy Westward Journey is a popular game on Apple devices. NetEase also partners with Activision Blizzard to operate localised versions of its games in China. These core franchises have helped NetEase average 38% revenue growth for the last five years.
• Sea Ltd (NYSE: SE): Sea Limited is an online gaming and ecommerce company based in Singapore. The company owns the Garena Digital Entertainment platform and Shopee, a large ecommerce company. Garena develops online games and operates multiplayer games like FIFA online, League of Legends and Heroes of Newerth in Asia. Its mobile game, Garena Free Fire, has over 500 million users. The gaming business has helped Sea Ltd grow revenue more than 10-fold over the last five years.

Pureplay gaming stocks

The following are the most significant gaming companies that are listed. The notable exception is Valve, owner of game developer Steam, which is a private company.

• Nintendo (NTDOY: US OTC, also listed in Japan and London): Nintendo is the oldest manufacturer of gaming hardware in the world. Since 1977 Nintendo has produced a long list of consoles and handheld gaming devices. The company also owns some of the classic early game franchises like Donkey Kong and Mario. It hasn’t always been smooth sailing for Nintendo, as sales of several consoles have disappointed. The result has been patchy revenue and a very volatile share price. However, revenue has grown steadily since 2017 when its latest consoled the Nintendo Switch was released. Investors are hopeful that the Switch can replicate the success of the PlayStation and Xbox lines.
• Activision Blizzard (Nasdaq: ATVI): Activation Blizzard is one of the oldest and biggest gaming companies in the US. The company is responsible for some of the most successful first-person shooter (FPS) games likeCall of Duty. Other core franchises include World of Warcraft, Diablo, Hearthstone, Overwatch, Candy Crush and Guitar Hero. These games mean the company owns arguably the most valuable portfolio of PC games. Activision is also a leading player in the esports segment and hosts competitive leagues for Overwatch and Call of Duty. ATVI’s revenue growth has slowed considerably over the last few years, though it has managed to improve its margins.
• Electronic Arts (Nasdaq: EA): EA is another of the original game development company based in the US. The company’s own games include Battlefield, The Sims, Apex Legends, and Need for Speed. Electronic Arts also licences games from other developers, including FIFA, Madden NFL, and Star Wars. With few new games to compete with the hit games on offer from rivals, EA has lagged over the last few years with. However, its fortunes are expected to improve as games are upgraded for the new consoles over the holiday season.
• Take-Two Interactive (Nasdaq: TTWO): Take-Two’s has been one of the best performing gaming stocks in 2020 due to its portfolio of massively popular games. Its games are owned via two subsidiaries, Rockstar Games and 2K. The portfolio includes titles like Red Dead Redemption, Grand Theft Auto, Borderlands, and NBA 2K. In addition, the company operates a popular esports leagues for NBA 2K. Take-Two is a highly regarded company that has managed to attract and retain some of the industry’s best talent. The company has also managed to keep its audience engaged and keen to upgrade titles when they are released.
• Glu Mobile (Nasdaq: GLUU): Glu Mobile is a leading developer of free-to-play casual games that are often overlooked. These games are available on social media platforms and as downloadable app. They are monetized through ad revenue and in-app purchases, rather than by selling access to the games. While mobile games are accessible to a larger audience, long-term growth is dependent on a sustainable pipeline of popular games. Glu’s market cap is only $1.7 billion which may make it an acquisition target at some point.
• Huya (NYSE: HUYA): Huya is China’s largest live streaming platform for gamers. The platform also operates globally as Nimo TV. The company, which is partially owned by Tencent, is expected to be merged with DoyYu, another streaming service. Both platforms currently have over 150 million subscribers.
• CD Projekt (US OTC: OTGLF, Frankfurt: 7CD): CD Projekt is the Polish games developer behind the successful Witcher series of role-playing games. The stock price has risen over the last few months in anticipation of the release in the next week of Cyberpunk 2077. The new game is an open world role-playing game set in the future. This is a speculative stock, and the direction of the stock price will depend on sales of Cyberpunk 2077.
• Ubisoft (US OTC: UBSFY, Paris: UBI): Ubisoft is the French company behind hit games including Assassin’s Creed and the Rainbow Six franchise. The stock price has risen over the last few months in anticipation of new games being upgraded for new PlayStation and Xbox consoles. In fact, the company is planning new releases for four of its major franchises over the holiday season.
• Zynga (Nasdaq: ZNGA): Zynga briefly became a market favourite in 2011 when it first listed. At the time its momentum was driven by the success of Farmville and Cityville, the most successful game on Facebook at the time. The company struggled to replicate the success of its early games again until 2018. It does now have a portfolio of free-to-play games available as Apps and on social media platforms. Revenue is generated from in game purchases and advertising. Growth has been strong in 2020, but whether or not it will continue remains to be seen.

Gaming hardware and peripherals

Besides the companies that own the games themselves, several companies manufacture the components necessary for video and audio devices, as well as related equipment. Investing in these companies can make stock picking easier, as you do not have to pick winning games or consoles. These are the most important companies in this segment:

• Advanced Micro Devices (Nasdaq: AMD) produces the CPUs and GPUs used in gaming PCs as well as well as the Xbox and PlayStation consoles.
• Nvidia (Nasdaq: NVDA) is the world leading manufacturer of graphics cards and other components vital to video games as well as cloud gaming.
• Corsair Gaming (Nasdaq: CRSR) produces PC components as well as peripheral equipment like keyboards specifically made for gaming.
• Logitech (Nasdaq: LOGI) also manufactures a range of peripheral equipment, including joysticks, cameras, and keyboards for the gaming market.

Other options:

There are three US listed pure play esports companies: Esports Entertainment Group (GMBL), Allied Esports Entertainment (AESE), and Super League Gaming (SLGG). These companies are all microcaps and have not yet reached profitability. They should therefore be treated as speculative plays. If you are looking for diversification, there are three exchanges traded funds (ETFs) to consider:

• The Wedbush ETFMG Video Game Tech ETF (GAMR) was launched in 2016 and holds 91 stocks. The expense ratio at 0.75% is relatively high.
• The VanEck Vectors Video Gaming and eSports ETF (ESPO) was launched in 2018 and is more concentrated and hold 26 gaming stocks. This fund is slightly cheaper and to own with an expense ratio of 0.55%.
• The Roundhill Bitkraft Esports & Digital Entertainment ETF (NERD) was launched in 2019 with an expense ratio of 0.25%. This fund has a broader universe and includes other types of entertainment stocks.

Conclusion: Investing in gaming stocks

The COVID-19 pandemic has resulted in the acceleration of several megatrends, including remote working and distance learning. Gaming is another industry that has benefited from the pandemic. Growth may slow down as the pandemic comes to an end, but the long-term prospects remain good. Firstly, the pandemic has brought more consumers into the gaming market. And, as smartphone and broadband penetration increases, more people will have access to games, even if they don’t own a PC or gaming console.