As the popularity of video games proves to be more than a temporary trend driven by pandemic lockdowns, professionals are highlighting the strong investment prospects in these companies.
According to the latest Global Games Market Report by games data platform Newzoo, the global games market is set to surpass $187 billion in 2024.
Projections have the market growing at a compound annual growth rate of 3.1 per cent to reach some $213.3 billion in 2027.
“This sector of video games and e-sports is relatively new and it is an emerging trend in the investment landscape,” said Alice Shen, portfolio manager at VanEck.
In conversation with InvestorDaily, she explained the thematic saw a strong surge in 2020, when individuals, particularly the younger generations, turned to video games as a source of entertainment.
“Since then, it has really grown […] into a more professional arena,” she said, pointing out that e-sports have hit the Olympic stage, with the inaugural Olympic Esports Series taking place in Singapore in June 2023.
The next edition, rebranded as the Olympic Esports Games, is slated to take place in Saudi Arabia in 2025, and will be held every two years.
“We don’t think this is a one-off phenomenon from the pandemic, it’s very much ongoing.
“We’ve seen some statistics from Twitch, the video game live streaming platform, and in terms of total hours streamed and the online viewership, they’ve remained elevated compared to pandemic levels,” Shen said.
“This is a trend that we don’t think is going to go away any time soon and there will be more opportunities in this space.”
VanEck’s Video Gaming and eSports ETF, ESPO, holds some $64.5 million in assets under management and counts Electronic Arts, Nintendo, Tencent, Gamestop, and Ubisoft among its 25 holdings.
Elaborating on the fund’s performance, the investment executive pointed out ESPO has outperformed the Nasdaq 100 and S&P 500 year to date, offering a different kind of tech exposure outside of the Magnificent Seven.
“Annual performance [of ESPO] has been strong as well, returning 21 per cent in the last 12 months as of the end of July,” Shen said.
As the global economy braces for rate cuts in the second half of 2024, Shen said a lower rate environment is likely to support video game companies in the US, which has observed compressed company valuations for the past two years.
“With the market expecting four rate cuts from the US by the end of the year, we do think there will be an upside or tailwind for these companies coming back,” she said, noting such tech-heavy companies are likely to do well in a rate cut environment.
Additionally, the prominence of artificial intelligence could serve as a tailwind, she told InvestorDaily.
Global X’s Video Games & Esports ETF, listed on the Nasdaq, holds around $116.7 million in net assets and was launched in late 2019.
Speaking to InvestorDaily, Billy Leung, investment strategist at Global X Australia, agreed there is “only room to grow” within this thematic as its user base expands and cloud-based gaming becomes more prevalent.
“Another thing that’s happening is vertical integration,” he said, pointing to major publishers like Electronic Arts, Activision, and Ubisoft losing ground to content creators like Netflix who are “coming in to acquire small game developers.”
“It’s going to challenge the original players,” Leung said.
“Netflix is already leveraging content to build new games, its popular show Stranger Things now has a game. Also, Disney owns Marvel and Star Wars, and is now building on these strong franchises and putting games out.”
This vertical integration has spurred increased M&A interest, he observed.
Most recently, Dublin-based video games group Keywords Studios, which offers services like translating games and producing parts of games for other developers, agreed to a considerable $4.1 million bid from private equity firm EQT. The company’s shares are up over 50 per cent year to date.
“When I speak with clients and investors, they keep asking what’s the next acquisition that could be happening [in this space],” Leung said.
Similar to Shen, the Global X strategist noted that the e-sports and video games theme can play a unique role in investment portfolios.
“I think this thematic is more niche, you need to really understand the market. I would say it’s very similar to, say, the semiconductor industry. It’s for people who have a very long-term view on this,” he said.
“If you look at the semiconductor industry, there’s a lot of volatility – geopolitics, product delays – but at the end of the day, the investment case is very solid, and we’re still seeing strong growth and technology improvements. It’s exactly the same with online games.”
However, he also acknowledged potential headwinds could affect momentum, such as antitrust laws which have already seen major Asian players like Tencent blocked from making certain acquisitions.
In 2021, China’s market regulator blocked the company’s plan to merge two of the country’s top video gaming streaming sites, citing antitrust grounds.
“What I’m really concerned with is, with more consolidation, when do we hit the mark when the US or EU say they’re not going to allow an acquisition?” Leung said.
Also, emerging technology, such as virtual reality (VR) and augmented reality (AR), could prove challenging to implement.
“[It has] lots of potential, but there’s an adoption hurdle,” he said.
“I think it’s still very slow, it’s high cost and limited content, because there’s no one that’s really producing content where you can use VR and AR. The only one that’s doing this is Meta and they’ve scaled back on this a bit.”
