E3 is in full swing this week and video game nerds, I mean, players are giddy. But for investors, the true gaming challenge is finding the right exposure to the trends in the industry.
The first eyes often go towards game makers like Take-Two Interactive (TTWO) , Electronic Arts (EA) , and Activision-Blizzard (ATVI) . A second glance might lead us in the direction of Gamestop (GME) or chip maker Nvidia (NVDA) . That's simply if we utter the words "video games." However, the industry has evolved. Now, we have to consider games like Fortnite or PUBG along with Twitch, a live streaming video game platform. Yes, people actually watch other people play video games. When you think about it, it's not much different than watching a sport. And we have professional leagues now with the game Overwatch leading the way in college and beyond.
The problem is beyond the obvious tier 1 of the game makers, we get into huge companies outside of Gamestop. Amazon (AMZN) , the owner of Twitch, has an $825 billion dollar market cap. Projections put Twitch revenue around $1 billion by 2020, although it is tough to say exactly where revenue stands now. Still, that will make up less than one-half of one-percent of Amazon sales in 2020. Not exactly a needle mover. In short, while Twitch may be exciting, there's no real way to invest in it.
Fortnite, owned by Epic games, is all the current rage. It's the new and next trend in gaming. The free game has created a survival e-sport with a battle royale format similar to the movie of the same title or the original Hunger Games. The company makes money via in-game purchases along with subscriptions, and it makes a lot. Epic Games made $296 million in the month of April!
While you can't invest directly into Epic, you can buy Tencent (TCTZF) , a 40% owner in Epic games. Unfortunately, we run into a similar problem as with Twitch. The Epic numbers are much stronger than Twitch in terms of revenue, but Tencent only holds a 40% stake. And Tencent isn't a small company either, clocking in with a nearly $500 billion market cap and approaching $50 billion in revenue. So, while the influence of Fortnite on Tencent should be greater than the effect of Twitch on Amazon, it won't be significant.
The shift towards a battle royale style of gaming is taking hold. Electronic Arts announced Tuesday it will include a Fortnite-like battle royale mode in Battlefield V. The company also announced a subscription service for frontline titles. Activision previously announced a battle royale mode for its best seller Call of Duty.
Rather than trying to chase these big names, the better play may be looking towards Chinese names Bilibili (BILI) or HUYA (HUYA) . With HUYA, you gain access to the "Chinese Twitch." The company saw revenues grow 111% year-over-year to $134.5 million and even turned a small profit this past quarter. Monthly average users shot up 19.2% in the quarter, and year-over-year daily average users grew 25%. With a market cap in the $6 billion - $7 billion range, it isn't cheap, but with some patience there should be an opportunity to scoop up shares a bit lower. Maybe. The challenge is these new issues have been flying high and not coming back to Earth, so they almost force a small position chase and then a wait-and-see approach on adding.
Bilibili is another online entertainment platform similar to Twitch and HUYA, but with a cross into gaming. I see it more as the Tencent-Amazon crossover in terms of gaming and entertainment. The smallest of the bunch at a $4.5 billion market cap and not yet profitable, BILI is growing revenue at 105% year-over-year with mobile gaming increasing by 97% to $109.8 million. Monthly average user growth is strong at 35%, but what's most eye catching is the 190% growth in average monthly paying users.
From the group, my eyes turn to ATVI, HUYA, and BILI. Those are my top 3 with EA just on the outside.
