Home » Video games as an investment target. Lessons from the COVID-19 pandemic

Video games as an investment target. Lessons from the COVID-19 pandemic

    Even those whose gamer careers ended with Tetris have heard of the Cyberpunk 2077 story. The video game industry has become the obvious beneficiary of the pandemic. But this market also has internal growth drivers. Investments in companies in this sector are a good choice for a diversified investment portfolio.

    Video game market in 2020: who made money on covid

    According to a report by Newzoo (data cites Gamesindustry.biz), the global video games market in 2020 grew by 20% and reached the mark of 175 billion dollars. Most actively growing revenue companies in the segment of mobile devices. Users spent $14.9 billion on boxed versions of games, and $158 billion on digital versions.

    We are talking about revenue growth for all companies that are part of the industry. Developer stocks grew stronger. If we do not take into account the individual outsiders, the figures will be in the region of +30-50%.

    At the end of the year, the value of Nvidia shares rose by 120%. The shares of one of its main competitors in the graphics card market, AMD, increased in price by exactly two times. Microsoft, which recently bought the studio ZeniMax (it includes the famous publisher Bethesda, which owns the Fallout series) for $7.5 billion, estimated gaming industry revenues in 2021 at $ 200 billion.

    At the end of the year, shares of Activision Blizzard on the NASDAQ stock exchange were worth around $ 92 dollars (6870 rubles on the MICEX) compared to 58 dollars a year ago. The growth of quotations was 58.6%. This is the best indicator for the whole almost thirty-year history of the company. The maximum growth was recorded at the end of November, immediately by 17%, after the release of the Shadowlands add-on for World of Warcraft. This is probably one of the most popular games in the world, which is more than 15 years on the market.

    Electronic Arts stock rose from about $108 to $143 as of Dec. 31, 2020, or 32.4% over the year. The leader, according to IBD Stock Checkup, was the South Korean company Gravity (the developer of Ragnarok Online) whose shares rose in price by 383% over the year.

    Playing games is no longer shameful. The attitude towards the industry has also changed in the world of finance. Investing in video game makers used to be a thankless task.

    It’s worth stating that the video game market started 2020 from a low base. The last relatively successful year for the industry was 2018, and 2019 came out weak. Therefore, no one expected anything outstanding from companies in this sector last year. Until the COVID-19 pandemic happened, the effects of which, combined with a low starting position at the beginning of the year, led to good growth for almost all gaming content producers.

    In 2020, the video game industry was actively interested in big investors, foreign pension funds, and banks. It was the obvious beneficiary of the pandemic back at the beginning of the first wave. Unlike the newcomers that shot up in parallel (companies like Zoom or those that provide telemedicine services), video game studios have been around for a long time and are well known.

    The pension fund manager, who wanted to hedge his risks in the situation when the coronavirus was spreading, took the shares of the notional EA company he knew instead of understanding Zoom and its growth drivers. Already in April, the video game manufacturers made new historical highs and their shares kept growing till July-August.

    Then came some cooling. Investors became more discerning in the fourth quarter. They were betting already for next year, choosing companies that could continue to effectively monetize new users. In the gaming industry, it’s harder to maintain long-term user interest in a game. Everything is tied to new releases and updates.

    Video games after the pandemic: what to expect?

    For private investors, the situation where the video game market is once again out of the focus of the big players is only a plus. Yes, revenue expectations for game content developers for 2021 are much more modest. This, by the way, applies to all sectors (online retail, telecom, etc.), which took the cream off the pandemic: they are forecast to see a halving in growth rates.

    Two things are significant for the gaming industry:

    • The rise here has not been as extravagant as, for example, in the e-commerce segment. Therefore, the slowdown, when the world in 2021 will gradually return to its former way of life, will not be so dramatic.
    • Companies in this market are only indirectly affected by the mass-vaccination story. The main factor here is what releases they are preparing for users this year. This is more important than the macroeconomic situation in the sector.

    We already know all the titles from the key studios coming out in 2021. You can estimate the size of the companies’ revenues.

    Cyberpunk 2077 was launched in development in 2015, by the end of 2019 the game was thoroughly enriched with marketing and got Keanu Reeves in one of the main roles, becoming almost a cult before release. In 2020, however, the studio ran into trouble, and it wasn’t a pandemic. CD Projekt was simply not up to the task it had undertaken. Employees complained about horrible working conditions, endless overtime, management’s attitude, and payment delays; the game was constantly postponed.

    When it came out, it was an unfinished game with many critical bugs, and previous generations of consoles suffered from poorly optimized and unplayable versions. Users began to give money back. Sony removed the game from sale on the PS Store. The launch of the game was dubbed the failure of the year, angry audiences and critics began to lower its scores. On top of that, one of the top managers was accused of insider trading, and a number of investors want to file a class-action lawsuit against the studio for misrepresentation.

    An independent company in the entertainment industry could have had enough of half of these problems to “fall apart.” But let’s look at the numbers: Cyberpunk 2077 broke the all-time record for the number of players on the first day of sales, CD Projekt has already sold 13 million copies (including returns), and most importantly: the company is worth $7.32 billion, having fallen in value since the beginning of the year by only 6% (although it was up 61% in August).

    There are two main conclusions from the CD Projekt story:

    • The risks in the game developer market are high; every game is to some degree a cat in the bag, as development often takes place in an atmosphere of secrecy. And in the case of independent developers, who put all the chips on the flagship product, this is an important factor.
    • The influence of the mass media and the reaction of the Internet community is far from as great as it may seem at first glance. The numbers rule here, too. If the product does exist, and if it has potential, no wave of public criticism is capable of counteracting sales.

    The company has made peace with its employees and is releasing patches for Cyberpunk 2077, which still leads by a giant margin in the number of online players among all single-player games. As of Dec. 21, 2020, CD Projekt RED stock has stopped falling.

    Choosing a strategy: ETF, mutual fund, or self-discovery of stocks

    How do you invest in the video game market and get a good return with reasonable risks? For almost any other sector, we’d answer that it’s optimal to find an actively managed fund that contains stocks of relevant companies, or a suitable ETF.

    For the gaming industry, it’s better to pick companies in an investment portfolio on your own. First, professional managers very rarely bet heavily on the gaming industry, given the volatile cash flow from game sales.

    Second, there is virtually no normal ETF that tracks this whole situation well. Exchange-traded investment funds mostly focus on hardware manufacturers, game consoles: Nvidia, Nintendo, Corsair Gaming, Advanced Micro Devices, Razer. In the structure of such funds, there is a large share of companies indirectly related to the industry: Microsoft, Apple. Games are definitely not the main driver of their earnings growth.

    ETFs with video game market companies in their structure:

    • Wedbush ETFMG Video Game Tech ETF (GAMR);
    • VanEck Vectors Video Gaming and eSports ETF (ESPO);
    • Roundhill Bitkraft Esports & Digital Entertainment ETF (NERD).

    Third, the private investor in this market has an advantage over professional managers and the opportunity to earn more funds if he understands how such companies are structured, what they make a profit on, what games they release, and what you can expect from them in the future.

    Bonus. Beyond the Gaming Industry
    The rise of the game industry can be seen with the naked eye. Showbiz stars have stopped hiding their addiction to computer games. Avid gamers, for example, were actors Vin Diesel, Henry Cavill, Samuel Jackson, Mila Kunis, Daniel Craig, Zac Efron, the Canadian rapper Drake, 23-time Olympic champion Michael Phelps. Such names have a huge impact on the popularization of video games.

    Many celebrities have begun to embrace streaming (especially during the pandemic). This is not only a new platform of interaction with fans, but also an opportunity to work off another sponsorship contract.
    Speaking of streaming: the gaming industry already has its celebrities making millions from their name. Gamer Tyler Ninja Blevins, who made the cover of ESPN Sports magazine last year earned $17 million, and one of the most popular talk shows in the United States, The Tonight Show, has invited him on the air three times.
    The biggest earnings in the gaming industry still belong to streamers, but also cyber-sport players are already earning more than athletes in most second-tier sports.
    Game dramas have become a frequent phenomenon. Hollywood producers, with their penchant for reliable solutions, know that popular game franchises guarantee audiences for successful distribution. For example, the movie “Sonic at the Movies,” despite several scandals before its launch, paid off nearly four times as much at the box office.

    On the small screen, video games generally give life to the highest-grossing projects, such as the action-horror “One of Us,” coming out in 2021 on HBO, or “The Witcher” (the series is based on a series of books, but it is fairly obvious that without the huge fanbase created by the series of games, it would have a smaller budget or not see the light of day at all: game sales were several times higher than book sales before the series launched, and then broke even more off).

    Higher prices, the shift from disc sales to digital copies (downloading a game makes the producer more money than selling it on disc), weaker competition from movie theaters, concert halls, and stadiums, cinematic graphics, and the habits that consumers acquired during the pandemic will all allow producers to continue to increase revenues.