Three stocks to bet on the esports craze

The global esports industry is projected to hit US$1.1 billion by the end of the year, and these stocks are trading at discounts to our fair value estimates

Vikram Barhat 3 July, 2019 | 1:39AM

The video-game market is skyrocketing at breakneck pace, fuelled by newer technologies, innovation and growing appeal amongst the youthful global audience hooked on mobile devices. One of the fastest growing segments of the industry is the esports market.

This year is expected to be a watershed in the evolution of esports. While a small part of the larger gaming landscape, the global esports industry is projected by Goldman Sachs to hit US$1.1 billion by the end of the year, clocking a staggering 26.7% year-on-year growth, and is expected to reach US$3 billion by 2022. China is set to rack up US$210.3 million in revenue in 2019, leapfrogging Europe as the second-largest region by revenues, according to market research firm Newzoo

The industry offers a long growth runway for leading players quick to shift levers to maintain dominance and capture the biggest share of the market.  Investors looking for esports play could tap some of the following companies, all trading at discounts to our fair value estimates, and all at the forefront of the video-game industry’s push into esports.

 

Activision Blizzard Inc 

 

Ticker

ATVI

 

Current yield:

.78%

 

Forward P/E:

22.57

 

Price

US$46.85

 

Fair value:

US$62

 

Value

24% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

****

Data as of June 28, 2019

 

Activision Blizzard (ATVI) is one of the world's largest video-game publishers that owns some of the largest and well-known franchises, including Call of Duty and World of Warcraft (more than US$8 billion of lifetime saes).

The company is upping its esports game with five franchises for a new global, city-based Call of Duty esports league. “The firm is well placed to consolidate its leading position by developing compelling new versions of its existing franchises and by introducing new experiences, such as Hearthstone and Overwatch,” says a Morningstar equity report.

In a bifurcated market split between major AAA blockbuster titles and smaller indie games “Activision generally focuses on the higher end of the market, using its capital to fund the higher-budget blockbusters and its marketing advantage to support its titles across multiple advertising platforms,” says Morningstar equity analyst Neil Macker.

The video-game behemoth is going through a transition this year sharpening focus on its six core franchises --Call of Duty, Candy, Overwatch, Warcraft, Hearthstone, and Diablo. Macker, who pegs the stock’s fair value at US$62, projects the 2019 revenue to fall 16%, as a result of the transition, before bouncing back to 6% annual growth over the next four years. 

 

Take-Two Interactive Software Inc 

 

Ticker

TTWO

 

Current yield:

-

 

Forward P/E:

25

 

Price

US$113.19

 

Fair value:

US$118

 

Value

4% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of June 28, 2019

Take-Two (TTWO) is an independent video-game publisher that owns Grand Theft Auto (GTA), one of the most-played franchises of the past 20 years. The firm has diversified its revenue sources with other well-known franchises including NBA 2K, Civilization, Borderlands, Bioshock, and Xcom.

“Its portfolio of successful franchises allows the firm to monetize its IP by delivering content via sequels, expansion packs, and downloadable content (DLC), exemplified by the current popularity of the GTA Online and the NBA 2K games,” says a Morningstar equity report.

A dedicated user base allows the company the leverage to push more of its games via direct digital channels, sidestepping retailers, thus generating higher gross margins and returns on invested capital, says Macker, who puts the stock’s fair value at US$118. Online multiplayer games, he adds, lead users to develop social networks which drives player loyalty through informal friendship networks and actual teams.

 

Electronic Arts Inc 

 

Ticker

EA

 

Current yield:

-

 

Forward P/E:

22.37

 

Price

US$101.26

 

Fair value:

US$108

 

Value

6% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of June 28, 2019

Leading video-game publisher, Electronic Arts (EA) owns several large franchises including Madden, FIFA, Battlefield, Mass Effect, Dragon’s Age, and Need for Speed. The firm recently signed a 10-year contract with Disney that granted EA the exclusive rights to develop Star Wars games for core gamers across all platforms.

“The firm will consolidate its leading position by developing compelling new versions of its existing franchises and with its Star Wars license,” says a Morningstar equity report, noting that the company benefits from the continued growth of the gaming landscape fuelled primarily by a new generation of consoles and proliferation of mobile gaming.

The company is expected to continue using its stable of franchises and licenses to create new games, particularly in the free-to-play (F2P) space. While the F2P market is highly competitive with popular titles jostling for gaming enthusiasts, “the firm’s recent success with Apex Legends demonstrates the opportunity available to EA,” says Macker, who recently lowered the stock’s fair value from US$115 to US$108, prompted by slower microtransactions penetration and slower margin expansion.

 The video-game titan will continue to release its sports franchises annually, generating a steady revenue stream,” says Macker, who projects 7.1% revenue growth from 2020 through 2023, driven by 10% annual growth in mobile revenue, 6% in PC revenue, and 7% in console revenue.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Activision Blizzard Inc45.14 USD-1.27
Electronic Arts Inc87.50 USD-1.89
Take-Two Interactive Software Inc116.06 USD-1.39

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.