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Reopening and China are causing moderation in gaming
Peter Garnry
Chief Investment Strategist
Summary: In today's equity update we take a look at the gaming industry which is currently experiencing a setback in equity markets as sentiment has soured a bit on the Chinese gaming crackdown and stagnation in gaming consumption in the developed world as economies are reopening. The question is whether this year's setback is a buying opportunity. Given the industry's profitability and long-term outlook we remain positive on the industry and our view is that investors should consider increasing exposure to gaming.
Our gaming theme basket is the worst-performing theme this year down 14.7% driven by a moderation of gaming consumption driven by the reopening of economies as vaccines are rolled out and employment is soaring. China’s gaming crackdown has also caused Chinese gaming companies to experience lower share prices as investors are uncertain of the long-term impact. One of potential regulatory changes rumoured in China is time restrictions for kids under 12 with the limit set to one hour on weekdays and two hours during weekend days and holidays. NetEase, one of China’s largest gaming companies, is expected to report earnings on Friday.
Despite some moderation in gaming consumptions and investors taking profit, the long-term outlook remains strong with a recent PwC report highlighting that gaming and esport growth is expected to grow 32% from 2021 to 2025. With gaming being very profitable for those with hit games the profit margins are luring new entrants into the industry. Netflix is branching into gaming with its large user base which could increase competition for other existing companies and squeeze smaller players with less distribution. This TV interview with Take-Two Interactive CEO is a good rundown of the current industry trends.
Our gaming basket is showing healthy revenue growth of 30.3% and EBITDA growth of 43.6% y/y, and analysts have not reduced their price targets much despite falling gaming stocks with the median price target being 36.6% above current prices suggesting strong sentiment. The video card manufacturers NVIDA and AMD are among the few gaming related companies with either a negative or low price target relative to the current price as the semiconductor constraints are now becoming a constraint on revenue growth for these two companies. We remain positive long-term on the industry and the overall valuation picture also look attractive combined with strong profitability in the industry, so the recent setback could be an attractive time to look for exposure to the gaming industry. The key risks are naturally stricter regulation out of China, stronger pace on employment reducing gaming consumption, and higher interest rates impacting valuations negatively.
| Name | Segment | Market Cap (USD mn.) | Sales growth (%) | EBITDA growth (%) | Diff to PT (%) | Return 5Y |
| Tencent Holdings Ltd | Mobile games | 597,129 | 27.77 | 45.0 | 49.7 | 161.1 |
| NVIDIA Corp | Graphics card | 496,805 | 52.73 | 72.9 | -1.2 | 1,185.5 |
| Sea Ltd | Mobile games | 155,731 | 101.14 | -46.1 | 6.9 | NA |
| Advanced Micro Devices Inc | Graphics card | 129,157 | 45.05 | 91.4 | 4.5 | 1,482.2 |
| Activision Blizzard Inc | Video games | 64,542 | 24.61 | 45.6 | 38.5 | 108.0 |
| Nintendo Co Ltd | Video games | 62,617 | 34.42 | 80.0 | 39.3 | 168.4 |
| NetEase Inc | Mobile games | 61,294 | 24.35 | 12.8 | 45.7 | 138.9 |
| Electronic Arts Inc | Video games | 38,996 | 1.66 | -21.1 | 23.0 | 77.6 |
| Bilibili Inc | E-sport streaming | 30,822 | 77.03 | -256.8 | 75.5 | NA |
| Unity Software Inc (*) | Graphics engine | 30,235 | 42.58 | -69.5 | 19.5 | NA |
| Take-Two Interactive Software Inc | Video games | 18,606 | 9.19 | 30.1 | 33.3 | 286.3 |
| Nexon Co Ltd | Video games | 17,205 | 17.90 | 17.4 | 44.2 | 205.9 |
| Embracer Group AB | Video games | 10,526 | 71.91 | 112.0 | 67.9 | NA |
| Playtika Holding Corp | Mobile games | 10,077 | 25.64 | -7.3 | 54.9 | NA |
| Zynga Inc | Mobile games | 8,812 | 49.42 | -16.0 | 49.4 | 204.5 |
| Konami Holdings Corp | Video games | 8,284 | 3.75 | -3.2 | 24.0 | 72.8 |
| Ubisoft Entertainment SA | Video games | 7,328 | 39.44 | 69.3 | 35.8 | 37.7 |
| Capcom Co Ltd | Video games | 7,224 | 16.81 | 45.9 | 36.6 | 520.2 |
| Square Enix Holdings Co Ltd | Video games | 6,996 | 24.79 | 36.3 | 10.7 | 111.2 |
| Kingsoft Corp Ltd | Video games | 6,827 | 27.98 | 31.7 | 60.9 | 163.4 |
| CD Projekt SA | Video games | 4,302 | 310.32 | 554.2 | 7.1 | 395.4 |
| Keywords Studios PLC | Game consulting | 2,902 | 14.42 | 53.0 | 13.9 | 692.1 |
| Corsair Gaming Inc | Hardware | 2,639 | 55.16 | 244.7 | 41.0 | NA |
| HUYA Inc | Game streaming | 2,601 | 30.33 | 142.8 | 95.8 | NA |
| DeNA Co Ltd | Mobile games | 2,303 | 12.84 | NA | 17.2 | -27.4 |
| Stillfront Group AB | Video games | 1,970 | 102.90 | 108.6 | 103.6 | 733.3 |
| Paradox Interactive AB (*) | Video games | 1,873 | 39.13 | 43.6 | 34.9 | 167.0 |
| GungHo Online Entertainment Inc | Video games | 1,760 | -2.51 | 9.6 | 24.6 | -17.8 |
| DouYu International Holdings Ltd | Game streaming | 1,187 | 31.84 | NA | 114.3 | NA |
| Aggregate / median values | 1,790,749 | 30.3 | 43.6 | 36.6 | 167.0 |
Source: Bloomberg and Saxo Group
* Peter Garnry owns shares in these companies
Our gaming basket has been reduced to 29 stocks as Glu Mobile was acquired in April by Electronic Arts. All our theme baskets are annually updated in January unless a major IPO warrants an inclusion so the gaming basket will run in a reduced size until then.
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