5 Reasons to Invest in the Video Game Industry November 12, 2019

When Google announced Stadia, a new cloud-based gaming platform in March 2019, the world turned their attention to the video game industry.

Cloud-based gaming is just one of the many segments in the fast growing video game industry, which also comprises traditional computer, console and mobile games. The video game industry generated USD131 billion as a whole in 2018.1 While the industry was traditionally dominated by gaming players such as Electronic Sports (EA.US), Activision Blizzard (ATVI.US) and Ubisoft Entertainment (UBI.FP), the introduction of technology giants such as Google and Microsoft indicates that the gaming industry is likely to continue its growth.

According to Newzoo’s report, the video game industry is on track for a decade of double-digit growth at about 11% a year, with global revenue expected to hit USD180bn in 2021 as seen in Figure 1 and USD300bn in 2025.

Figure 1: 2012 – 2021 Global Games Market Revenue per Segment

Factsheets

Source: Newzoo Quarterly Update

While traditional game titles are likely to stay given its popularity, the engagement with computer and console games is expected to grow further, driven by competitions and the ever-growing eSports segment. This, fuelled by the encouragement of in-game spending and maintenance of upfront pricing, has made the video game industry one attractive investment option.2


Why will the Video Game Industry Continue to Expand?

1) Expansion in the Global Markets
In the past, the main markets for video game are North America, Europe and Japan. However, in the past decade, the industry has seen rapid growth in more markets such as China, India and South East Asia.

2) High Adoption of Mobile Gaming
Within the industry, mobile gaming is the fastest growing video gaming platform. As the accessibility to smart devices increases, so does the accessibility to video games.

3) Switch to Digital Distribution
Digitalisation has helped companies eliminate the distribution cost of the middleman, as well as packaging and shipping costs. These cost savings can be further passed down to consumers in terms of cheaper gaming cost, hence making video games even more affordable.

4) Subscription-based Model for Video Games
This is one of the fastest growing sectors in the video game industry, aside from mobile gaming. Consumers can opt for recurring payment through in-app spending to either continue playing the game or purchase virtual goods and currencies to enhance their in-game experience.

5) Rise of eSports
eSports, a billion-dollar business, has seen tremendous growth over the years, both in terms of viewership and revenue. The growth in revenue comes from the increase in viewership and eSports marketing, which includes game sponsorships.

1. Expansion in the Global Markets

The Chinese Market Boost

In 2018, China generated around USD38bn in video gaming revenue, making up almost 28% of the world’s spending on gaming. The rise of eSports, mobile gaming, subscription models and streaming services, alongside the significant penetration into the Chinese market in recent times, act as long-term drivers for the video game industry.

However, video gaming is a double-edged sword with its disadvantages. In recent years, Beijing has grown increasingly vocal about the negative impact of violent gaming contents and the social impact of gaming addiction on the country’s young people. As a result, China ordered a freeze in video game licensing to review the whole industry.

At the end of 2018, Beijing resumed commercial licensing for video games, ending a nine-month long freeze. This comes as a great boost to the industry; although time is needed to clear a backlog of more than 5,000 game titles pending approval.3


Video Gaming Worth more than Video and Music Combined in United Kingdom

According to the Entertainment Retailers Association (ERA), the video game industry in the United Kingdom (UK) is worth GBP3.86bn, accounting for more than half of the UK’s entire entertainment market. The growth can be attributed mainly to the adoption of game applications on smart devices and the transition from physical distribution to digital distribution for many games and consoles.4


The Gaming Explosion in Southeast Asia

Southeast Asian countries – namely Indonesia, the Philippines, Malaysia, Vietnam, Thailand and Singapore – have fast growing economies and a growing middle-class population. The rise of eSports in the region can be attributed to the growth of disposable income amongst the middle class group, in turn leading to an increase in spending on leisure activities such as video games. As seen in Figure 2, more than 50% of the online population in the various Southeast Asian countries are classified as gamers.

Figure 2: Gamers in Southeast Asia

Factsheets

Source: Newzoo

Another reason for the growth of the video game industry could be the use of English language in the region. As a result, it is easier for companies to penetrate the Southeast Asian markets.5


2. High Adoption of Mobile Gaming

Slated as the fastest growing sector in the video game industry, mobile gaming has come a long way since its early days. In 2018, mobile gaming revenue reached USD70.3bn, accounting for 51% of the global video game industry and is predicted to continue to rise to 59% by 2021. The mobile gaming segment is expected to reach USD106bn in revenue by 2021, representing an increase of more than 730% over the past nine years. The increase in ownership of smart devices over the past decade is likely to have contributed to the growth in mobile gaming. Other possible reasons for the growth include the rise in disposable income and increase in affordability of gaming apps.

Investments from big game studios like Tencent and Ubisoft, as well as financial firms such as Goldman Sachs’ private equity investment arm and KKR help companies grow and improve on gaming contents. In recent years, governments have also started to establish funds to support local gaming businesses for them to improve their creatives and technology. Aside from funding, efforts were also made to train local employees and attract foreign talent in the area of creativity and technology enhancement. These developments in the mobile gaming ecosystem have created a more sustainable future for the video game industry.6


3. Switch to Digital Distribution

Digital distribution of computer and console video games has been around for a period of time thanks to fast and stable internet connection and the large hard drive in consoles. It has brought about convenience for consumers given the wider selection of games, unlimited and instantaneous downloads, while also preserving the environment since it eliminates packaging, saves space and reduce waste.

Going digital does not represent a fundamental change on how people play video games these days, although it changes the rate of adoption. The cost savings and the ease of obtaining the games will continue to attract more people to access video games from the comfort of their home and while on the move.


4. Subscription-based Model for Video Games

Subscription-based plans have worked well for music and TV contents as seen from Spotify and Netflix. Many analysts are betting that video games will be the next frontier for the subscription-based model since it can provide a stable source of income for the game developers.

In March 2019, Google announced Stadia, a cloud-based gaming platform which allows gamers to play games for a monthly fee of USD9.99. EA sports and Microsoft’s Xbox have existing subscription-based gaming plans which give customers access to over 100 games. Apple has also launched a subscription-based service named Apple Arcade which gives customers access to over 100 exclusive iOS games. Whether it is the traditional computer, console, mobile or the new cloud gaming, one thing’s for sure: the fight for subscription-based model for video games is just the beginning.

Similar to Netflix, in order for the subscription-based model to be successful in the video game industry, companies must create compelling and exciting content. Strong titles, enjoyable contents and top performing services such as bug elimination and regular content upgrades are important to drive customer’s loyalty.7


5. Rise of eSports

2019 will be the first billion-dollar year for eSports. Sponsorship alone generates approximately USD450m in revenue, with the global eSports audience set to surpass 450 million in 2019, a 15% increase from 2018.8

In 2016, more spectators – approximately 43 million – watched the “League of Legends” finals than the seventh leg of the NBA finals which recorded 31 million viewers. In 2018, 103 million viewers watched the Super Bowl, which is slightly more than the 99.6 million who watched the “League Worlds”. These examples clearly show that eSports is already a spectator sport just like soccer, baseball and basketball.9

One of the main reasons for the rise of eSports is the increase in video game streaming across platforms such as Twitch and YouTube. Whether on a competitive or an educational nature, game streaming has attracted a big audience, so much so that traditional sports leagues such as NBA, NFL and ESPN have jumped onto the eSports bandwagon by partnering with video game companies.


How to Invest in the Video Game Industry?

Video Gaming Companies

For those looking to invest in the video game industry, there are several ways to enter. Firstly, investors can look at traditional big video game producers. Table 1 shows a list of such companies and their stock data.

Table 1: List of Video Gaming Companies

Ticker Name Mkt Cap (USD million) Price (USD) Analyst Call Price Target (USD)
TTWO.US Take-Two Interactive 13,726 121.28 21/5/1 134
EA.US Electronic Arts 27,245 92.45 24/11/2 111.2
ATVI.US Activision Blizzard 40,790 53.18 27/7/2 57.6
UBI.FP Ubisoft Entertainment 6,592 56.88 EUR 15/7/1 82.95

Source: Bloomberg dated 14 Oct 2019

Take-Two Interactive has produced many popular titles such as Red Dead Redemption 2, Civilisation, the Grand Theft Auto and NBA series. EA Sports’ most popular game, FIFA, has been very successful for the past two decades, with their most recent project being a partnership with Liverpool FC which aims to bring fans closer together and let them engage with the world of football entertainment.10 Another very popular game developer is Activision Blizzard, which has an extensive list of great titles such as Warcraft, Diablo, Overwatch and World of Warcraft. The recent re-launch of World of Warcraft: Classic has been met with enthusiastic reception amongst followers, leading to many analysts turning bullish on its stock.


Semiconductor Chipmaker Companies

Secondly, semiconductor chipmakers are another way to invest in the growing video game industry. NVIDIA Corporation (NVDA.US) and Advanced Micro Devices (AMD.US) are the two biggest chipmakers that will benefit from the growth of eSports and the video game industry. As the popularity of video games grow, demand for computers, consoles and smart devices will increase. As a result, demand for chips will increase significantly. This, coupled with the fact that chipmakers are constantly innovating and producing better and faster processing chips, can only be good news to the video game industry. For instance, in July, AMD released its Ryzen 3000 Series to critical success on all fronts while Nvidia is looking to launch a next-gen GPUs early 2020. More information about these counters can be found in Table 2.

Table 2: List of Semiconductor Chipmaker Companies

Ticker Name Market Cap (USD million) Price (USD) Analyst Call (Buy/Neutral/Sell) Price Target (USD)
NVDA.US NVIDIA Corporation 111,460 183 28/8/4 200
AMD.US Advanced Micro Devices 30,807 28.4 14/22/4 33

Source: Bloomberg dated 14 Oct 2019

Technology Giants

Technology companies like Google and Amazon are also jumping onto the bandwagon, with Google announcing the launch of their cloud gaming platform, Stadia, in 2019. Aside from the cloud gaming platform, these companies are also invested in game streaming. YouTube, wholly-owned by Google, has been one of the major players in the streaming of eSports. Twitch, another platform that has been bought over by Amazon in 2014 for USD940m and as of 2019 valued at around USD3.79bn, is the world‘s leading live streaming platform for gamers and has an average of 1.25 million concurrent viewers, up 17% from 2018. These giants’ involvement in the video game industry just shows how lucrative this growing industry is. Table 3 shows more information on Google and Amazon, including analysts call.

Table 3: List of Big-Tech Video Game Related Companies

Ticker Name Market Cap (USD million) Price (USD) Analyst Call (Buy/Neutral/Sell) Price Target (USD)
GOOGL.US Google inc 837,000 1207 39/6/0 1410
AMZN.US Amazon 849,691 1718 53/2/0 2265

Source: Bloomberg dated 14 Oct 2019

Video Game ETFs

Lastly, investors who prefer a more diversified way of investing in the video game industry can look towards video game ETFs. Here is a list of ETFs that investors can consider adding into their portfolio:

Table 4: Video Game ETFs

Ticker Name Market Cap (USD million) Price (USD) Expenses Ratio Inception
GAMR.US ETFMG Video Game Tech ETF 81.7 40.9 0.75% 9-Mar-16
ESPO.US VanEck Vectors Video Gaming and eSports ETF 37.34 33.32 0.55% 16-Oct-18

Source: Bloomberg dated 14 Oct 2019

Video Game Industry: The Worthy Long-term Winner

Historically, video game stocks have been volatile as they rely on the ability of developers to produce gaming contents and the frequency of it. A move to a subscription-based model could provide a consistent stream of revenue for companies while they continue to innovate and deliver great content for gamers and strong performance for shareholders. The continuous growth of the video game industry and its ecosystem will further strengthen the industry outlook, hence presenting itself as an investment opportunity for growth seeking investors.

Information is accurate as of 14 Oct 2019

Reference:

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About the author

Allan Tan
Assistant Manager

Allan joined Phillip Securities in 2013 as an Equity Dealer in the Global Markets Team.

He specialises in the US, UK, European & Canadian markets.

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