Video game stocks have seen tremendous yet consistent growth over the past 5 years. The industry has consolidated since last decade to now a few established players.
There four important themes to understand in the video game industry today:
- The growth of mobile gaming
- PC gaming resurgence in Asia
- The rise of micro-transactions
- The emergence of eSports
We’ll also cover the 5 video game stocks that are best exposed to these 4 themes:
- Tencent (TCEHY)
- NetEase (NTES)
- Activision Blizzard (ATVI)
- Electornic Arts (EA)
- Take-Two Interactive (TTWO)
Let’s get started on the 4 major investment themes in gaming and our list of the best video game stocks.
Theme 1: Less console, more mobile
Traditional video game stocks are going through a secular transformation.
Gamers are increasingly playing games on smartphones over PC and console. This has brought more casual gamers into the market and has expanded video game companies’ addressable market significantly.
Mobile gaming revenue has become the largest interactive entertainment segment, driven by global smartphone growth.
It’s been particularly strong in Asia. Worldwide mobile revenues were up 16% y/y to $43 billion in 2017. Of the $43 billion in revenue in 2017, roughly 40% will come from Western markets, while 60% came from Asia.
Tencent and NetEase are video game stocks that lead the pack in mobile gaming market share.
Asian markets are expected to continue to drive mobile revenue growth at 10-15% per year going forward. In the US and Europe, there are 500 million mobile gamers drove nearly $17bn in-game and paid game purchases, with the remaining $2 billion from advertising.
The mobile game market is still fragmented
The mobile game market remains competitive and fragmented. It has low barriers to entry for developers and high fad risk for titles as they go viral.
However, the mobile gaming industry has been consolidating over the past few years. Established video game makers have been aggressively buying up quality mobile developers, most notably Tencent for Supercell (Clash of Clans) and Activision Blizzard for King (Candy Crush).
The top five mobile game makers by revenue are Tencent, Sony, Activision, Apple, and EA. In particular, Tencent and Apple get a percentage of all mobile gaming apps sold through their app platforms, WeChat and iTunes.
Mobile gaming is also a more competitive business, much harder than traditional console gaming. Top game publishers enjoy the benefits of one or two viral titles that dominate for a few years. On the other hand, low barriers to entry drive the high fragmentation at the lower end of the market.
Mobile gaming market share
Faster mobile gaming consolidation in Asia
The Asian mobile games market has been consolidating at a faster speed. Big brands like Tencent, NetEase, and Mixi capturing a bigger combined share. Tencent owns the WeChat platform and gets a cut of all mobile gaming revenues generated through the platform. NetEase has historically been the strongest game developer and enjoys strong distribution relationships with Activision Blizzard. Tencent and NetEase are the best-positioned video game stocks to benefit from mobile game growth in Asia.
Free-to-play and whales
In mobile games, around 5% of all players generate the vast majority of in-game revenues. A small percent of players pay (low ARPU), but players who do play spend a significant amount per month (high ARPP).
Mobile game players tend to concentrate their spending on one major title, rather spread it across different games. Only a few large games can capture a critical mass of this high-spend cohort.
Conversely, the smaller titles struggle to build a comparable viral following. So far, capturing a loyal payer base is far more lucrative than advertising to a larger non-payer base.
Live services are a key mobile monetization driver
Western mobile game publishers are copying their eastern counterparts and increasing their live services offerings, a shift in the model vs selling games in app stores.
For example, Zynga has refocused its monetization model on live services of existing games (vs big focus on new games), and this initiative has been a growth catalyst. Core platforms like Poker and CSR2 have shown better user engagement as a result of live services events and features, and 2017 user and revenue growth has reaccelerated y/y on this transition.
Theme 2: the resurgence of PC gaming
In the past, PC games were reserved for the hardcore gamers. Console games have traditionally dominated overall video game unit shipments.
However, PC gaming has seen a resurgence over the past 5 years, driven by:
- More affordable computer hardware
- More powerful laptops purposely built for gaming
- Popularity of MMORPGs, such as World of Warcraft
- Popularity of freemium games, led by League of Legends and Fortnite
The global PC game market is not as relevant to US publishers. It’s also more mature than the mobile game market, but it’s still providing video game stocks with a source of new digital revenues.
Like in mobile, Asia leads the U.S. in mobile gaming. Asia accounts for over 53% of global PC gaming revenues, led again by Tencent. The Asia PC market itself totaled $17 billion, primarily driven by China and Korea. China’s PC gaming market is $10 billion in sales and up 5% y/y, Korea $5 billion and up 2% y/y).
Even though the Western PC gaming market is slightly smaller, it has accelerated growth to 6% y/y up from 3%. Top US PC titles include League of Legends, DOTA 2, and World of Warcraft.
Revenue mix varies by geography. In Asia, the core market includes MMOs like NetEase’s Fantasy Westward Journey Online and MOBAs like Tencent’s League of Legends (LoL).
NetEase and Tencent together comprise over 70% of the Chinese PC gaming market.
In the West, it includes both casual PC games on Facebook like Farmville, subscription-based MMOs like Activision’s World of Warcraft (WoW), free-to-play MMOs/MOBAs (like LoL), and full PC game downloads.
PC gaming market share
Theme 3: Micro-transactions
Since the launch of XBox 360 and PlayStation 4, downloadable content (DLC) and micro-transactions (MTX) have driven greater player engagement and monetization on consoles.
Downloadable contents include add-on content like map packs, character customization, or new single-player campaign add-ons. Microtransactions consist of mechanics like virtual currency in Take-Two’s Grand Theft Auto V online or supply packs in Activision’s Call of Duty: Infinite Warfare.
In the early days of digitally enabled consoles, publishers focused on larger content updates such as map packs to drive additional monetization. More recently, the focus has shifted to micro-transactions. This has the benefits of driving more frequent engagement as players “grind” for in-game currencies, which drives higher engagement.
Micro-transactions over downloadable content
The traction for micro-transaction revenues has been quite strong. In 2017, digital console revenues grew 20%+ y/y to $16 billion globally, approximately 80% of revenue from US and European markets. Video game publishers have put a greater emphasis on MTX content over DLC.
An MTX model provides several advantages to DLC content:
- Mechanics: when built into the standard gameplay, MTX mechanics can have lower development costs vs. full new content drops.
- Same player base: live service and free updates with MTX mechanics can enable monetization without fragmenting the player base.
- Repurchases: MTX items generally can be used up and need to be repurchased.
- Longevity: MTX allows video game publishers to monetize a player base years after a games release potentially building a waterfall of reoccurring revenues streams from franchises.
Going forward, micro-transactions will continue to increase as video game stocks transition from downloadable content to micro-transactions. Video game stocks that are best positioned to benefit from micro-transactions are Activision, Electronic Arts, and Take-Two Interactive. Despite the Battlefront 2 debacle, micro-transactions are set to return for EA.
Micro-transactions could slow after 2019, as the console industry already has a strong cohort of franchisees that are capturing this revenue. The greatest risk to the industry is that games are over monetized and lose gamer appeal.
The secular rise of eSports
eSports, or competitive gaming, has become a major new form of entertainment.
eSports is a nascent but explosive industry, generating an estimated $700 million in direct revenue in 2017. It also drives additional micro-transaction spending.
Going forward, the industry has opportunities to generate new advertising revenues (streaming, sponsorship), ticket sales, promotions, and merchandise. The revenue model would be similar to traditional sports teams.
Currently, League of Legends and Dota 2 dominate the eSports prize money, viewership online, and player base, particularly in Asia. This will likely change with the rise of Fortnite, which has been rapidly building an eSports scene.
eSports is now a multi-billion dollar industry
Overall, eSports is a small part of the $100bn global video game market. However, it offers video game stocks the potential to strengthen player engagement and grow new revenue streams.
NewZoo estimates eSports to grow to $1.5bn by 2020, driven by sponsorships, advertising, and publisher fees.
At the current pace, Fortnite is set to overtake League of Legends as the #1 eSports game by 2019. Fortnite is developed by Epic Games based in North Carolina. Tencent owns a 49% stake in Epic Games.
eSports became popular outside the United States in the early 2000s. In Korea, Activision’s StarCraft became the basis for a league of competitive players who earned hundreds of thousands of dollars. StarCraft channels were created for people to watch StarCraft matches 24 hours a day. This phenomenon helped develop an early eSports industry in Asia.
A new business model
Today, new titles and broadcast platforms are driving the popularity of competitive gaming. Fans can watch eSports tournaments matches through Twitch, YouTube, and Facebook.
Several factors that indicate that eSports could develop into a bigger industry from its current early growth stage:
- Bigger tournaments and prizes: companies in the industry are seeding large tournaments with bigger prize pools.
- Higher daily player engagement: data suggests over 13 million gaming hours per day are being watched on Twitch alone, and gamer demographics are attractive.
- More content: new streaming services like Twitch, Facebook streaming, and YouTube are adding content and building a bigger eSports fan base and providing exposure for professional gamers.
- Formation of professional leagues: new eSports leagues (like Overwatch) are being formed that have major company and investor backing.
Traditional sports present a working franchise model
Traditional sports are a massive industry, generating an estimated $65 billion in the U.S. across multiple sports.
Traditional sports has monetized off of four key areas:
- Ticket sales from games
- Advertising revenues from TV and online streams
- Sponsorship deals and promotion
- Team merchandise sales
eSports has the opportunity to build similar tangential revenue streams in addition to in-game purchases and title sales.
eSports viewership is growing, though well below traditional sports eSports unique viewers are up y/y, and hours streamed is also increasing annually. Yet these metrics are still a small relative to traditional sports.
While several media reported that 43 million unique viewers watched the League of Legends final, peak concurrent US viewers were estimated at closer to 5.9 million. Still, eSports viewership is meaningful and growing relative to most traditional sports.
Of the traditional video game stocks, Activision and Tencent are best positioned to benefit from eSports. Activision is building a professional league around Overwatch, while Tencent owns 49% of Epic Games, the developer of Fortnite.
The best video game stocks
Here is a complete list of video game stocks mentioned in this guide that are best positioned to the 4 trends mentioned above.
Tencent Holdings is the largest Internet, social media, and gaming conglomerate in Asia. It generates revenues through the sale of virtual goods on its social platforms and games.
It operates through the following segments: Value-Added Services, Online Advertising, and Others. The Value-added Services segment involves online and mobile games, community value-added services, and applications across multiple Internet and mobile platforms. The Online Advertising segment represents display based and performance-based advertisements. The Other segment consists of trademark licensing, software development services, software sales, and other services.
Tencent’s most valuable asset is the mobile messenger platform WeChat, which provides integrated messaging, blogging, payment, gaming services on one platform.
Activision Blizzard (ATVI)
Activision Blizzard is one of the 4 largest video game publishers in the U.S. It operates through the following segments: Activision, Blizzard, and King.
The Activision segment develops and publishes interactive software products and entertainment content, particularly for the console platform.
The Blizzard segment develops and publishes interactive software products and entertainment content, particularly for the PC platform.
The King segment develops and publishes interactive entertainment content and services, particularly on mobile platforms.
Take-Two Interactive (TTWO)
Take-Two Interactive primarily focuses on console game development and is best known for the Grand Theft Auto series.
Take-Two was founded in 1983 and grew through a series of acquisitions of game studios, most notably Rockstar Games. Other well-known franchises include Red Dead Redemption, NBA 2K, Borderlands, and Civilization.
NetEase is recognized as the best game developer in China, particularly in PC MMOs. NetEase has produced some of China’s online PC-client games, including the Westward Journey series, as well as Tianxia III, Heroes of Tang Dynasty Zero and Ghost II. It also has a strong partnership with Blizzard and distributes its PC games in China, including World of Warcraft, Hearthstone, StarCraft II, Diablo III, and Overwatch.
Electronic Arts (EA)
EA is the largest video game stock by revenues. EA publishes games under multiple labels and is particularly known for its sports titles under EA Sports. Franchises include FIFA, Madden NFL, NHL, NCAA Football, NBA Live, and SSX.
EA is also known for action titles, including Battlefield, Need for Speed, The Sims, Medal of Honor, Command & Conquer, as well as newer franchises such as Crysis, Dead Space, Mass Effect, Dragon Age, Army of Two, Titanfall and Star Wars.
Video game stocks: final words
That’s it for our complete guide to the 4 major investment themes among video game stocks. Let us know if you have any questions below.