Picture this scene: High-priced athletes with their faces set in grim determination, screaming fans showing loyalty with branded gear, millions of people watching at home. Are you imagining a video-game competition? If not, you may want to get with the times.
Though some may be shocked to hear it, technology-consulting firm Activate has estimated that more than 250 million people worldwide watch "e-sports.” By some estimates, e-sports will surpass traditional sports viewership in the near future.
Consider that the total prize money for the most popular e-sports title, Dota 2, is estimated to have topped $177 million across more than 1,000 tournaments worldwide. And keep in mind that gamer Tyler "Ninja" Blevins made it onto the cover of ESPN magazine last year, proving how mainstream these competitions have become.
No wonder investment bank Goldman Sachs has estimated that the global audience for e-sports will reach 385 million viewers a month by 2022, topping traditional sports including the NFL!
If you still believe that video games are just kids’ stuff, consider that the Entertainment Software Association estimates the average age of a gamer is 34 years old, with about two-thirds of American households playing some form of video games on a regular basis. This is a booming consumer industry with a lot of discretionary dollars behind it.
Countless other statistics show the global popularity and bright future of the video-game industry. But obviously, the most important one for investors is profit that can be generated via publicly traded technology stocks catering to this subsector of gaming.
Here are five potential ideas to cash in as e-sports and gaming grow and go mainstream.
1. Video Game Tech ETF
The simplest way to invest in the video-game megatrend is via the ETFMG Video Game Tech ETF GAMR, +0.14% This is admittedly a niche fund, but it's pretty legitimate, with more than three years of market history and roughly $100 million in assets under management.
More than 70 total components span the breadth of the gaming industry, from smaller software studios to big hardware manufacturers and tech conglomerates. The Video Game ETF is also a truly global fund, with names U.S. video game customers will recognize alongside some massive Chinese companies that are known mostly to gamers in Asia. For instance, right now the fund’s top holding is Hong Kong-listed mobile game publisher iDreamSky Technology Holdings 1119, -0.62% — a stock that's not easily accessible to U.S. investors.
Since its 2016 inception, the ETF has outperformed handily, gaining roughly 75% vs. about 45% for the broader S&P 500 SPX, +0.88%
2. Tencent
Though many investors and gamers may not realize it, one of the most dominant stocks in the gaming space is Chinese tech powerhouse Tencent Holdings TCEHY, +0.82% The name doesn't spring to mind as an iconic studio, since it doesn't put the Tencent brand on its biggest hits, but it's a force to be reckoned with.
The company owns Riot Games, publisher of “League of Legends,” which was one of the first global e-sports megahits a few years ago. It also owns 80% of Grinding Gears Games, which publishes the popular “Path to Exile” franchise, and 40% of Epic Games and its iconic “Fortnite” title that just topped 250 million players worldwide. Moreover, the company also has minority stakes in legacy studios including Activision Blizzard ATVI, +2.58% and Ubisoft Entertainment UBSFF, +1.11%
In some ways, Tencent is its own version of a video game ETF, given how broadly it has spread itself around the industry. However, it's important to understand Tencent is similar to other tech giants including Google parent Alphabet GOOGL, +1.34% and Amazon.com AMZN, +1.93% in that it has its fingers in many pies and video games aren't the only thing it does. Those looking for an indirect or diversified play on gaming may find this attractive.
3. Nintendo
In contrast, Nintendo NTDOY, -3.56% is one of the biggest names in the history of video games. Things were touch-and-go a few years ago after its Wii U console flopped, but the company has been on a tear since the launch of its innovative Switch console. Shares are up almost 70% since the beginning of 2017, including year-to-date gains of about 30% in 2019.
There are a host of reasons for that, including continued strength for native Nintendo franchises including Mario and Zelda, as well as efforts to make its platform easily accessible to software developers of both new titles and legacy games looking to "port" over. The result is a vibrant next-generation ecosystem of games for both console and mobile, connecting with consumers and revitalizing the Nintendo brand.
Recent talk of a big move into China to boost sales bodes well for Nintendo’s continued growth, too, as do rumors of a revamped line of Switch consoles targeting both the higher- and lower ends of the gaming market to broaden reach and keep hardware sales humming along.
(In full disclosure, I am a dyed-in-the-wool Nintendo fan. I still have a few dozen original NES cartridges at home, and have been known to force my children to play Duck Hunt. But this nostalgia factor alongside the admittedly strong current performance is proof positive that this company has staying power. )
4. Nvidia
Semiconductor firm Nvidia Corp. NVDA, +1.17% made a name for itself in the PC-gaming space with its popular graphics cards, and remains the go-to option for those who want cutting edge graphics and technology. After all, an Xbox or PlayStation isn't easily customizable, while there are plenty of ways to build and upgrade gaming rigs via computers.
This is closely tied to the e-sports trend, too, where all serious gamers use a keyboard and mouse and desire the highest performance to gain the edge of a few milliseconds in competition.
Nvidia shares have been quite volatile over the past few years as cryptocurrency miners caused a spike in demand — then sales dried up as bitcoin prices fell back to earth. But the worst is now over, with even hardcore bears like short-seller Citron Research backtracking on their bearish take after Nvidia shares plunged by more than 50% in late 2018.
Going forward, Nvidia stock is sure to be more closely aligned with its core hardware business. The company has called its new RTX graphic platform as its biggest leap forward in 15 years, and its recent investor day presentation showed a five-year growth rate of 29% in gaming hardware revenues — including 59% year-over-year revenue expansion for its fast-growing laptop gaming segment. Now that the dust has settled and investors focus on the "old" Nvidia, the strength of these numbers in its all-important gaming segment should shine through.
5. Huya
A very different play on video games than either hardware manufacturers or software studios is fast-growing streaming platform Huya Inc. HUYA, +1.25% The Asian tech stock just celebrated its one-year anniversary after a 2018 IPO, and while shares have been a bit sleepy in the last several months it remains a key video game stock to watch.
That's because Huya is a leader in gameplay streaming, which is increasingly in demand both for the viewing of formal e-sports competition as well as casual viewership for gamers.
Huya holds tremendous potential, given the massive growth of gaming and e-sports. Considering Amazon acquired a similar streaming platform in Twitch for almost $1 billion in 2014, it's clear that there is real money behind this trend even if the industry isn't yet a cash cow.
According to Huya's most recent earnings in March, this fast-growing company is connecting with viewers at a remarkable rate — and that audience is really starting to add up. Revenue more than doubled in 2018 over 2017, and fiscal 2019 forecasts predict another 50% growth. Huya’s total active users jumped 35% last year, topping 110 million viewers. The company is currently operating at break-even, but as with so many other fast-growing tech stocks the promise lies in becoming the stand-alone leader in what will be a highly lucrative industry — and Huya is clearly on its way to achieving that goal.
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