Gaming is a long-term winning industry

The gaming industry will continue grab leisure market share

The pandemic was a game changer for the gaming industry with many more users being exposed to gaming as sports events and general leisure activity closed. According to data on gaming consumption the average American adult spends around an hour a day gaming socially online, and streaming of esports is gaining popularity. A good indication of this came in 2019 when the CEO of Netflix said that the company’s biggest threat was not Disney or HBO, but that of Fortnite, one of the most popular games in the world.

In 2019 before the pandemic emerged, the industry generated $120bn in revenue (see revenue breakdown below) and by 2021 it is projected that 2.7bn people will be playing games on one platform or another. The industry has benefitted a lot from smartphones allowing the industry to steal time from people commuting or when they have spare moment. Many games are also designed around the same reward feedback loops invented by social media platforms increasing engagement (often just a positive word for addiction). The future of gaming will see fierce competition as the high profitable growth in gaming is luring in big technology firms such as Apple, Google, Amazon, and Microsoft into the industry. The expectation is that VR/AI will be come more dominant features of gaming in the future but so far Facebook’s bet with Oculus has not turned into the success everyone was predicting.

Key risks to consider

The pandemic has lifted revenue growth rates for all gaming companies and elevated their share prices and equity valuations. As society opens on the back of vaccines people likely prioritize to socialize physical for some time and go to restaurants and cafés instead of playing video games. This could reduce revenue growth in 2021. In November 2019, China introduced new regulation that restrict playtime for minors as gaming can be addictive and especially because gaming developers are become better at designing games with reward feedback loops derived from learnings in social media. This Chinese regulation hit initially Tencent hard, but the Chinese company recovered as Covid-19 increased gaming consumption from the elderly population. Similar regulation could come to the developed world over time reducing time spent on gaming.

Other key risks are the difficulties as a gaming developer to constantly develop the next new game that will captivate users to keep growth high. There are several examples of gaming developers once successful losing their ability to innovate. Big companies such as Apple, Google, and Amazon are also seizing opportunities in the gaming space following the footsteps of Microsoft. With these technology giants and their enormous distribution, they could become a big threat to existing gaming developers and their gaming platforms.

Many gaming stocks come with rich equity valuation which means that the implied equity risk premium is low. This means that rising interest rates impacts the equity valuations more and thus the risk of rising interest rates in the US should be a key consideration for investors that want exposure to the gaming industry.

Previous notes on equity themes:

The commodity sector and the reflation trade in 2021 – 4 January 2021

Bubble stocks go into ‘hyperdrive’ mode – 8 January 2021

Introducing Next Generation Medicine basket – 20 January 2021

Updating our Green Transformation theme basket – 29 January 2021

Launching Saxo’s E-commerce theme basket as more growth lies ahead – 5 February 2021

Be careful of bubble stocks and updating bubble methodology – 12 February 2021