Judging by the amped-up energy inside Brooklyn’s Barclays Center for the premier Overwatch League finals, esports is here to stay — and it’s going to be a big, sustainable consumer trend that should have a place in your investment portfolio.
I’m not an esports fan, at least not yet. But I went to last weekend’s finals as an investor to see what all the fuss is about. The atmosphere was electric, especially considering that fans basically watched two teams lined up behind tables on stage, playing games on a big screen above them.
London Fusion played Philadelphia Fusion in a sold-out 20,000-seat arena, and London won. It wasn’t quite up there with a Beatles show. No second British Invasion. But it was close. And a lot more electric than most major league sports finals.
This enthusiasm is one reason Baird analyst Colin Sebastian thinks interactive entertainment will become the biggest piece of the media and entertainment sector, hitting $145 billion in annual sales by 2020. That makes it a “must own” area for investors, he says.
But how? Sebastian highlights content providers Activision Blizzard ATVI, +0.92% Electronic Arts EA, +2.01% and Take-Two Interactive TTWO, -0.08% Here’s a look at these companies and six others that should be good plays on this trend.
The league owners
Videogame publishers benefit directly because they own the esports leagues. This brings in revenue via ticket sales, merchandising, media rights, advertising and sponsorships. They also benefit indirectly because esports will bring in more fans and help boost product sales.
Here are the four main companies in esports leagues so far.
• Tencent Holdings TCEHY, -0.65% 0700, -3.27% owns Riot Games, whose League of Legends is one of the world’s most popular games and the basis for the League of Legends Championship Series esports league. Tencent is a key esports holding because it offers exposure to the popularity of esports in China, its home turf. China has the largest gamer base in the world, with about 442 million gamers as of 2017 and a 57% penetration rate of Chinese internet users, according to the China Internet Network Information Center. This year, China will contribute a third of the global game industry’s total revenue, says NewZoo.
Tencent has a deal with Disney DIS, +0.83% (DIS) for streaming and broadcast rights for League of Legends through 2023, and it is launching a competitive-gaming television channel in China.
• Activision Blizzard owns the Overwatch League, the league that played that final at the Barclays Center. The league has 12 teams now, but it wants to expand to 28. Activision Blizzard will also create an esports league for its Call of Duty game, says Goldman Sachs analyst Christopher Merwin.
Activision Blizzard looks attractive for other reasons. It already has a popular mobile game in Candy Crush. A key source of growth will be the conversion of PC- and console-based titles into mobile games. Mobile is huge in China. So this could give it a greater presence in China, where the company hopes to expand via a partnership with NetEase NTES, -0.62%
Another catalyst for the stock should be the release of “Call of Duty Black Ops 4” in October.
“We believe Activision is building a Disney-style entertainment business for the 21st century, but with higher operating margins,” says Jefferies analyst Timothy O’Shea.
Like the shares of other game publishers, Activision Blizzard stock can suffer bouts of weakness on fears about competition from Fortnite, published by Epic Games. But not to worry. “While undeniably the hottest game we’ve seen in years, Fortnite is more about expanding the market than cannibalizing it,” says O’Shea.
Read: Want to make money off the ‘Fortnite’ videogame? Buy this stock
• Take-Two Interactive has a partnership with the National Basketball Association to launch the NBA 2K eLeague.
• Electronic Arts is developing leagues based on its Fédération Internationale de Football Association (FIFA) and Madden NFL Football games. It doesn’t get much credit for this yet, says Merwin. So it could be the sleeper here.
London Fusion wins the 2018 Overleague Watch championship in Brooklyn.
Underscoring the financial muscle behind esports are the big brands that have signed on as sponsors. They include Toyota TM, -2.33% 7203, -2.51% HP HPQ, -0.09% Intel INTC, +0.86% T-Mobile US TMUS, +0.30% , Nissan 7201, +0.05% Berkshire Hathaway’s BRK.A, -0.62% BRK.B, -0.61% Geico, and Axe, owned by Unilever UN, +0.19% UNIA, +1.03% ULVR, +0.61%
Moreover, esport team buyers include traditional sports teams owners or top executives at the New England Patriots, the New York Mets and Comcast Spectator, which owns the Philadelphia Flyers.
Read this about videogame earnings: Esports are here to stay, but who is poised to make a killing?
The platform companies
Twitch is the most popular platform for watching esports and competitive gaming online. It’s a big deal. Average daily viewership for January was 962,000, which means it did better than two major cable TV according to Mintel. For 2017, average daily viewership was 885,000 for MSNBC and 783,000 for CNN. Celebrities are catching on to the size of the Twitch audience, and making appearances. In March, Drake played Fortnight with the popular gamer Tyler “Ninja” Blevins.
Twitch is one of Amazon.com’s AMZN, -0.10% best-kept secrets, says Motely Fool writer John Ballard. He thinks Amazon’s 2014 purchase of Twitch for $970 million is starting to look like a really clever move. Ballard describes Twitch a social network for gamers where viewers can watch their favorite streamers, chat with other gamers and develop their skills.
As the biggest platform, with about 70% of monthly active users in the online gaming space according to Goldman Sachs, Twitch benefits from the “network effect.” This means it has the power to continually attract more users, and become more useful to them as it does this. Amazon.com makes money from Twitch by taking a cut of sales on the platform. It has also integrated Twitch into Prime, which helps Prime get more users. “Twitch represents one of the most compelling assets in the world of esports,” says Goldman Sachs analyst Heath Terry.
Oddly, Amazon doesn’t mention Twitch in its most recent 10-Q. It mentions it once in its most recent 10-K, but only as a formality and with no description.
Electronic Arts looks like another good platform company to own. Taking a page out of the books of Netflix NFLX, +0.74% and Spotify SPOT, +3.42% Eletronic Arts is developing a streaming game service.
“CEO Andrew Wilson is positioning the company for a future in which videogames are streamed to all devices via subscription,” says Jefferies analyst Timothy O’Shea. The company will offer all its games on the service, and it is working on adding third-party party titles.
The arms merchants
According to tech investing lore, you do well investing in the companies that make the gear used in a tech trend, and not just the companies selling the final products or services. If that’s true, then Nvidia NVDA, +0.30% should continue to be a good investment. It makes the high-end GeForce line of graphics processing units (GPUs) used in the high-powered PCs that gamers like. So the growing popularity of esports will help Nvidia.
“We view Nvidia as uniquely positioned to capture growth in the PC gaming user base,” says Goldman Sachs analyst Toshiya Hari. Nvidia has a dominant position in game-related chips, in part because it puts most of its development budget into its GPU platform while competitor Advanced Micro Device AMD, -5.61% invests in a number of different product lines. Nvidia’s specialized chips are also used in artificial intelligence, machine-learning data centers and self-driving cars.
For arms merchants, also consider Logitech International LOGI, -4.55% a top supplier of high-end gaming mice, headsets and specialized gaming keyboards. And don’t forget Microsoft MSFT, +0.67% It never did well with smartphones. But consoles are another matter. Microsoft sells the popular Xbox. Late last year it refreshed the line by rolling out the Xbox One X with hardcore gamers in mind.
Should you buy an ETF instead?
For a broad based approach to the videogame and esports trends, consider the $120 million videogame Tech exchange-traded fund GAMR, -0.13% It holds most of the major players in this space, but be warned: it has 72 stocks (the largest is Glu Mobile GLUU, +2.50% ), so it is not a pure pay on the names I’ve highlighted above. It also has a steep expense ratio of 0.82%. Not only is that a lot higher than the category average of 0.55%, as calculated by Morningstar, but it’s way more than the 0.09% expense ratio levied for the SPDR S&P 500 SPY, +0.49% which tracks the S&P 500 index SPX, +0.49%
The ETF is essentially flat on the year, compared with the S&P’s 5% gain.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested INTC, BRK.B, AMZN and MSFT in his stock newsletter Brush Up on Stocks. He is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.
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