Gaming isn’t just a game anymore
- AMD, Electronic Arts, Gaming, Investment theme, Mobile Gaming, Nintendo, Nvidia, Smartphones, Sony, Tencent
- July 15, 2020
One of my key investment themes is gaming. I strongly believe that gaming over the next decade will be what smartphones were over the previous decade.
People are more connected than ever before. Every day, more and more people get fast internet access. In a world of social distancing, gaming becomes a welcome escape and a source of entertainment. In a world beyond social distancing, a lot of that will stick.
Gaming is growing
Of course, the gaming industry benefits from the proliferation of smartphones. Serious gaming on dedicated platforms accounts for around half of the industry and mobile gaming accounts for the other half.
Mobile gaming was a US$70bn industry before lockdown changed our lives. Some reports now put it at US$90bn. That’s an industry that cannot be ignored by any serious investor.
Dedicated gaming platforms can only get stronger from here as well. Busy professionals are finding time to experience the racetracks of the world or get to grips with the latest weapons. This isn’t just about kids anymore.
Reports came out today that Sony is roughly doubling its PlayStation 5 production to 10 million units in 2020. Their biggest challenge will be manufacturing and shipping the consoles under current global supply chain constraints. It’s clear that there are strong signs of growth in this industry.
Some researchers have estimated a compound annual growth rate (CAGR) for the industry over the next 7 years of 16%. That’s substantial in a global context and will considerably outpace overall economic growth.
A generation of people have grown up in a world where “avoiding screen time” is becoming practically impossible. After all, mom and dad are on Zoom calls for 5 hours a day.
How do you invest in this space?
There are a number of global stocks that let you participate in this journey: Nvidia, Tencent, Electronic Arts, Nintendo, Advanced Micro Devices…the list goes on.
There’s even an Exchange Traded Fund (ETF) focused on this: the VanEck Vectors Video Gaming and eSports ETF. It’s a mouthful, but check out this excerpt from the latest fund fact sheet:
I want to touch on the importance of valuation multiples in this context. Whilst most Robinhood investors (I’m certain many of whom are simply out of patience with Bitcoin) believe that valuations are unimportant and shares can only ever go up, that’s not true.
If you don’t know what Robinhood is, it’s a stockbroker in the US that is like Easy Equities on steroids. The difference is that Robinhood isn’t shy to let young people trade super risky instruments that they shouldn’t be allowed anywhere near. Easy Equities thankfully does no such thing, focusing instead on sound financial behaviour.
Price / Earnings ratio is probably the simplest of all valuation metrics and is widely used. It certainly has drawbacks, but the base principle is that it calculates how many years’ worth of earnings you are paying for in the share price.
For example, a company with annual earnings of R100 per share and a valuation of R1,000 per share would have a P/E of 10x.
If you look at the fact sheet above, you’ll notice that the Price / Earnings ratio of the ETF is 31.2x. Now, that would be considered high in many industries, but in the world of tech it’s actually quite reasonable.
For comparative purposes, Amazon is trading at 142x and Netflix at 104x. Interestingly, Facebook is more in line with the gaming industry, trading at 33x.
Tesla? Well, you need positive earnings for a full year before you can have a P/E ratio. That’s a topic for another day, but gaming stocks seem like a downright bargain compared to the valuations being applied to the likes of Tesla.
Robinhood investors certainly seem to believe that Tesla can only go up forever. That’s not a view that I share.
I do however believe that the world of gaming offers an intelligent way to participate in the tech wave that has become unstoppable. My parents might have tried to limit screen time, but kids in a few years will be learning how to design online games as a subject at school.
The world is changing and I’m investing accordingly.