Head of Equity Strategy
Summary: The gaming industry is a high growth industry growing revenue by 37% in 2020 as the pandemic lifted demand for gaming as way to socialize and be entertained with many traditional leisure activities closed due to Covid-19 restrictions. The gaming industry is not only a high growth industry it is also very profitable, but this in turn has lured big technology companies such as Apple, Google, Amazon, and Microsoft into the industry. Competition will likely increase but so will also the overall global revenue from gaming and analysts remain very positive on the 30 companies in our basket.
We have introduced five new equity theme baskets this year and we have many more coming. This is a good way to identify long-term trends in the economy but also a more exciting way to analyze the equity market during different volatility regimes. Today, we are launching our sixth equity theme introducing our Saxo Gaming equity theme basket consisting of 30 gaming stocks.
37% revenue growth in 2020
The gaming industry is a sprawling and fragmented industry with many companies deriving revenue and profits from other businesses than gaming. However, we have found 30 companies that we believe provide a good exposure to overall trend in gaming. The geographical split is good and as the segment column indicates exposure can be obtained either through graphics card manufacturers, streaming, or gaming developers. We have chosen the 30 largest gaming related companies on market value so this list should not be viewed as our investment recommendations. We like gaming overall, but investors will have to do the due diligence on the individual companies themselves.
| Name | Segment | Market Cap (USD mn.) | Sales growth (%) | EBITDA growth (%) | Diff to PT (%) |
| Tencent Holdings Ltd | Mobile games | 855,649 | 20.7 | 23.2 | 15.2 |
| NVIDIA Corp | Graphics card | 329,330 | 52.7 | 68.5 | 19.2 |
| Sea Ltd | Mobile games | 121,838 | 163.1 | 21.1 | 2.8 |
| Advanced Micro Devices Inc | Graphics card | 99,943 | 45.0 | 91.4 | 22.1 |
| Nintendo Co Ltd | Video games | 84,659 | 9.0 | 39.6 | 5.2 |
| NetEase Inc | Mobile games | 75,363 | 24.4 | 12.8 | 18.1 |
| Activision Blizzard Inc | Video games | 73,874 | 24.6 | 45.6 | 18.9 |
| Bilibili Inc | E-sport streaming | 46,400 | 77.0 | NA | 2.3 |
| Electronic Arts Inc | Video games | 38,942 | 11.9 | 45.9 | 17.4 |
| Nexon Co Ltd | Video games | 29,205 | 17.9 | 17.4 | 3.7 |
| Unity Software Inc | Graphics engine | 28,964 | 42.6 | -93.9 | 35.6 |
| Take-Two Interactive Software Inc | Video games | 21,242 | 15.8 | 46.6 | 19.1 |
| Playtika Holding Corp | Mobile games | 12,128 | 25.6 | NA | 27.0 |
| Zynga Inc | Mobile games | 12,015 | 49.4 | -28.4 | 17.1 |
| Embracer Group AB | Video games | 11,818 | NA | NA | 29.2 |
| Kingsoft Corp Ltd | Video games | 10,410 | 39.1 | 157.1 | 20.1 |
| Ubisoft Entertainment SA | Video games | 10,311 | -13.6 | -24.7 | 22.6 |
| Konami Holdings Corp | Video games | 9,745 | 0.1 | -10.9 | 1.9 |
| Capcom Co Ltd | Video games | 8,408 | -18.4 | 19.9 | 12.6 |
| Square Enix Holdings Co Ltd | Video games | 7,272 | -0.4 | 27.8 | 10.3 |
| CD Projekt SA | Video games | 6,845 | 43.6 | 68.8 | 17.9 |
| HUYA Inc | Game streaming | 6,682 | 79.6 | 474.4 | -2.0 |
| DouYu International Holdings Ltd | Game streaming | 4,818 | 99.3 | 94.9 | 0.5 |
| Stillfront Group AB | Video games | 4,000 | 102.9 | 109.3 | 39.5 |
| Corsair Gaming Inc | Hardware | 3,368 | 55.2 | 229.3 | 31.9 |
| DeNA Co Ltd | Mobile games | 2,677 | -2.2 | NA | -2.8 |
| Keywords Studios PLC | Game consulting | 2,672 | 30.2 | 26.2 | 14.7 |
| Paradox Interactive AB | Video games | 2,250 | 39.1 | 49.3 | 23.1 |
| Glu Mobile Inc | Mobile games | 2,174 | 31.4 | 22.4 | -0.1 |
| GungHo Online Entertainment Inc | Video games | 1,995 | -2.5 | 9.6 | 35.8 |
| Aggregate / mean values | 1,924,996 | 36.7 | 59.4 | 16.0 |
As the table indicates the revenue growth rate is very high with 37% on average in 2020 as the pandemic impacted demand positively. Whereas other high growth industries such as e-commerce is running low margins have difficulties generating large free cash flows, the gaming industry is very profitable. Capital expenditures required are low and revenue can easily scale due to the digital nature of the business. EBITDA growth was 59% in 2020 and analysts are very positive on the industry with an average price target that is 16% above the current price.
Our gaming basket is up 5.8% year-to-date and up 101% the past year and up 772% over the past five years. Historic performance is no indication of future performance so investors should not put to much weight on these performance metrics. They reflect the high growth of gaming but what is relevant is whether the growth can continue for another decade.
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
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