Head of Equity Strategy
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.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
