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