A new category of “interactive” entertainment has emerged in recent years and presuming it continues on the same successful path, E-Gaming, not to be mistaken for online gambling, is likely to become a significant contributor to the modern day economy.
According to USA Today, the worldwide video game market could grow from $137.9 billion in 2018 to $180.1 billion by 2021, with China, the USA, Japan, South Korea, and Germany ranked as the top five global markets.
Video gaming companies have evolved their strategy to adopt highly scalable models which capitalize on what seems to be an exponentially growing market.
Tencent Holdings (700:HK)
Despite the recent correction, Chinese technology behemoth, Tencent, continues a healthy recovery from November 2018. Having faced headwinds from the initial brunt of the trade war saga as well as a tightening of internal gaming regulations, this upwards momentum is much owing to the stellar performance by Epic Games. Tencent acquired a 48.4 percent stake in Epic Games, the developer of the well-known “Fortnite” for $330 million in June 2012.
The notorious “Fortnite” was the top grossing game in 2018 raking in an estimated $2.4billion in revenue. This remains the most popular game in 2019 with more than 80 million active users per month. Tencent also have ownership of League of Legends which has been going strong since its release in 2009.
The company has a strong presence across a range of media including a flourishing cloud infrastructure as well as holdings in other video game publishers including Take-Two and Activision Blizzard. Tencent also have tie-in advantages available with its dominant WeChat application, which is China’s biggest social media platform.
WeChat has essentially evolved from a messenger app introduced by Tencent in 2011 to an all-round lifestyle platform for users in China. The app has transformed into an ecosystem combining elements of Facebook, Twitter, video, and E-commerce such as Amazon, Uber, Apple Pay, etc. Third-party mini-apps are available for download and hosted on the platform (much like those offered on the Android or iOS mobile operating systems). This means that Tencent can actually benefit from third-party games that come to market on its WeChat platform; it takes a cut of their sales and encourages the use of its payment services and communication systems, further strengthening its overall product family.
China has recently experienced a slowdown in economic growth as well as a tightening in regulations regarding the licences needed to bring new games to the online market. These two factors are said to have contributed to the stock shedding over 20% of its value in 2018.
Given the recent challenges which could now, in hindsight, be seen as a potential opportunity, Tencent is a uniquely compelling, diversified investment in technology and content which could leave long term investors kicking themselves.
Video gaming companies such as Epic Games are trending towards more free-to-play titles and “games as service” models.
SuperData reported that the free-to-play video game market generated $87.7 billion in revenue in 2018. Free-to-play titles account for nearly 80% of all spending on digital games.
Free games earn revenue through micro transactions (small purchases which boost a player’s performance or give access to special items). These incremental purchases add up to big spending in an exponentially growing market with high volumes; mobile games earned $61.3 billion in digital sales in 2018, while games on traditional video game consoles and PC earned $48.4 billion combined.
Mobile gaming has greatly expanded the addressable market for videogames as barriers to entry such as cost have been reduced. Game developers will continue to explore how to best capitalize on the mobile audience.
Glu Mobile (GLUU)
The California-based Glu Mobile Inc. designs, develops, publishes and markets a diversified portfolio of mobile games. The company was incorporated in 2006 and has a market capitalization of $1,585.3M.
The stock, which gained around 87 percent in 2017, continued its bull run and clocked gains of around 112 percent during 2018. GLUU’s popular interior decoration simulation game, called “Design Home”, continued to be the top contributor to revenues. Glu Mobile also have the likes of “Tap Sports Baseball” (a baseball-licensed game); celebrity-focused games like “Kim Kardashian: Hollywood”; and “Covet Fashion” on their books.
With a healthy number of new games in the pipeline – which include the much awaited Walt Disney licensed “WWE: Universe” and “Diner Dash Town” scheduled to be released in 2019, the mobile game maker is expected to turn profitable for the first time in the last three years (Investopedia, 2019).
Are E-Sports Real Sports?
Electronic sports is a form of competition in which professional gamers are pitted against each other on multiplayer platforms. Once described as “competition augmented by technology”, the sport has attracted a huge following in recent years with thousands of fans gathering in arenas and millions watching online.
The below documentary published by VICE entitled “The Celebrity Millionaires of Competitive Gaming” follows some of the industry’s stars of and gives an insight into just how popular Esports have become.
Whether you view Esports as a real sport or not, competitive gaming plays a large role in the interactive entertainment industry and is growing even faster than the broader gaming industry. E-Sports is expected to generate in excess of $1 billion in annual revenue for the first time in 2019.
In March 2019, the English Football Association (FA) together with E-Sports company, ESL, hosted the finals of the FIFA eWorld Cup qualifiers in London, where gamers competed for a place in the country’s first Esports national team: the eLions. The players will represent England in the inaugural FIFA eWorld Cup 2019 and beyond. “This adds a 29th side to our stable of national teams”, FA chief commercial and football development officer Mark Bullingham said.
Perhaps, finally England may actually have a chance to win a football tournament on the world stage now?
Figure 1: (FIFA, 2019)
Figure 2: (mobilegeeks, 2018)
According to a recent report from analyst group Newzoo, an impressive 26.7% year-on-year growth increase in Esports revenues is expected in 2019. This is largely credited to media rights deals which are expected to grow by 41.8% to $251.3 million. Sponsorship still accounts for the largest portion of esports revenues with a whopping $456.7million estimated from advertising and marketing sales.
Figure 3: (Newzoo, 2019)
A 15% increase in viewership is also expected in 2019. This will bring the total audience to about 454 million worldwide.
Figure 4: (Newzoo, 2019)
Newzoo predict that on the current trajectory, the esports market will reach $1.8 billion by 2022.
NVIDIA Corporation (NVDA)
NVDA makes high-performance 3D graphics processors and related software used for gaming.
NVDA’s computer chips are the gold standard in gaming and can cost up to $3,000 a piece. 86% of competitive gamers use them and NVDA has become the official hardware provider for almost every major Esports league in the world.
Tencent, GLU Mobile and NVIDIA vs S&P500
Figure 5: (Bloomberg, 2019)
Tencent and NVIDIA have beat the market over the last 5 years. GLU Mobile has soared from October 2018, with the popularity of gaming continuing to explode.
With huge potential for technological advancement in virtual reality and other industry improvements to come, gaming sector investment is seen as a very exciting prospect indeed.
The not so distant future of gaming may well see the computing power hosted in the cloud making all games accessible from any device, anywhere. Streaming a game on a Saturday night could become as popular as watching a film.
Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.