Elias Zeekeh, MBA, CPA, CMA
Gaming Industry August 2022 | Investment Opportunities & State of the Industry
Across the board video game related stocks have had horrible results, and this includes both video game software manufacturers like Activision Blizzard & Electronic Arts as well as hardware manufacturers like Sony and Nintendo.
Part of this is pandemic related as people are out and about more and doing activities in person versus online, but additionally there have been a limited amount of blockbuster video game titles released this year.
Outside of the video game software and console manufactures there have also been gaming hardware companies like Corsair which have also done very poorly and had horrible financial results with their stock down 23%+ YTD. For those of you who don't know Corsair sells gaming streaming peripherals, creator peripherals, gaming keyboards, headphones, mice, dram, hard drives, and a whole bunch more gaming related products and services.
It is also no secret that the prices for graphic processing units have been dropping rapidly in recent months a further sign of weaker demand for gaming related products.
But zooming out and looking bigger picture this is an example of an industry in a cyclical downturn, but is in a long term secular trend. Overall esports growth is expected to reach over $12 billion by 2023 which is a 21.9% CAGR, and a lot of this revenue growth is expected to come in the form of sponsorships and media rights.
A good example of this is FTX's $210m sponsorship and naming right agreement with a esports club Team Solomid, and other firms like Coinbase and Uniswap have also aligned with team, tournaments and leagues. This follows a trend of convergence between the gaming world and the crypto NFT/Web 3 world and it will be interesting to see how this materializes. Potentially, esports can help drive further interest in NFT driven games and be a catalyst for blockchain adoption.
In addition to e-sports you also have the mobile gaming industry, and the reason why this is important is that if you look at especially younger demographics they spend a disproportionate amount of their time on their mobiles devices. Especially in the use of them for Education, Photo Video, and Entertainment.
Approximately one-third of people's waking hours are spent on a mobile devices, and this has been growing rapidly (30% since 2019). This has translated into significant increases in spending over the past few years as well as downloads.
During the recent downtrend in the gaming industry mobile gaming has remained relatively stronger and continued it's expansion.
If you're going to pick a time to build a position in gaming stocks now is probably a good a time as any. There is certainly major changes coming to the industry and the integration of NFTs is something the can really revolutionize gaming in several ways.
Firstly, in the current Web 2 gaming world games are typically walled gardens, so items received in one game can't be easily ported into an another. But in Web 3 you will own that particular item, so that could potentially increase the portability of that item such that you can use it in another game. Secondly, it could make it easier to monetize or sell that particular item say for Ethereum or USDC stable coin for example. Thirdly, if you have a really rare item perhaps via smart contract you can even rent the item out for a specific period of time and create some sort of income stream. There are many potential possibilities.
As I also mentioned in addition to esports there is also the trend of mobile gaming as people are spending more and more time on mobile devices for entertainment.
My hypothesis is where E-sports, Web 3, and Mobile converge if you're touching two of three through an investment and the other fundamentals of the investment are promising as far as the leadership the intellectual property, and the overall management of the business there is likely some opportunity to be found.
It is no surprise to me that bigger organizations have seen this as well. We've recently heard about the take out of Activision Blizzard by Microsoft for $95 per share and is expected to close in 2023, which is potentially an arbitrage opportunity with the stock currently trading in the low 80s. Activision Blizzard has several popular esports franchises like a call of duty and overwatch. You've also got the acquisition of Zynga which is a big manufacturer of mobile games by Take Two Interactive. Likely if the stocks of gaming related stocks stay at these suppressed levels I expect to see more acquisitions in this space.