Though the coronavirus is threatening countless businesses, not all sectors are suffering. Here’s a corner of the economy that’s thriving thanks to the pandemic

 

Yesterday’s Digest featured a quote from our CEO, Brian Hunt:

“It’s not so much a stock market as it is a market of stocks.”

The quote was a part of a discussion about today’s investing conditions –namely, while it’s easy to think of “the market” as one big monolith that rises or falls in unison, the reality is that it’s made up of thousands of companies with widely-varying fortunes — and futures.

While the coronavirus threatens to destroy some of those companies, it’s a tailwind to others.

Today, let’s look at one sector benefitting from this tailwind.

It’s performing so well that three of our InvestorPlace analysts have written about it independently in recent days. When one area of the market grabs this much attention, we take note.

So, in today’s Digest, let’s turn toward the multi-billion-dollar online gaming industry, and why Eric Fry, Matt McCall, and Neil George are all eyeing this sector today.

***How far video games have come

 

If the below is what comes to mind when you read “video games” then you’re like me — which means you’re old.

 

 

Today, video-game graphics have progressed to the point that they’re getting close to being indistinguishable from, say, a movie or a sporting event.

See for yourself. Below is a screenshot from NBA 2K20.

 

 

Not only have the graphics changed, so too has the way in which people play the games. Specifically, it’s no longer a solitary activity.

From Time:

Experts say we need to shed the stereotypical image of gamers as isolated loners playing for hours on end in a dank basement. Today, kids and adults can socialize with one another, in groups large and small, while playing games online. During the pandemic, connectivity stands out

Even before the coronavirus impacted our world, video games were becoming increasingly social events through the development of something called eSports.

In short, eSports refers to competitive online gaming that’s organized — we’re talking teams, fans, sponsorships, and huge events.

From CNN:

Competitors from different leagues or teams face off in the same games that are popular with at-home gamers: Fortnite, League of Legends, Counter-Strike, Call of Duty, Overwatch and Madden NFL, to name a few.

These gamers are watched and followed by millions of fans all over the world, who attend live events or tune in on TV or online.

Now, if you’re wondering just how lucrative this is, in a recent update to subscribers, Eric Fry established context, noting “According to Newzoo’s ‘Global Games Market Report,’ 2.5 billion gamers across the globe spent about $150 billion on games in 2019.”

Keep in mind, that was before the coronavirus …

***How the pandemic has goosed the online gaming industry

 

eSports and online gaming were already big, but in the wake of lockdowns and social distancing, demand is soaring.

In his latest issue of Profitable Investing, Neil George highlighted this surge:

Millions of folks are trapped at home, leading to surging demand for online content. I continue to monitor that data and media demand from two main sources: Comscore (SCOR), a monitor and measurement company for online products, and Nielsen (NLSN), which tries to count viewers for television and other programming.

In March, Comscore reported that electronic gaming on consoles (using a proprietary hardware device like Microsoft’s Xbox) surged 48%.

And while not as impressive, the demand for gaming data not just from consoles but also through desktop and laptop computers as well as mobile devices is up 19% through April, with most popular games leading the way.

Looking forward, experts are predicting robust demand even after our world reemerges from lockdowns.

In Matt McCall’s recent update to subscribers, he put numbers on this:

With professional sports leagues on hold, more investors are learning about eSports’ incredibly bright future.

The industry is expected to grow from $694 million in 2017 to $2.17 trillion by 2023, per MarketsandMarkets.

***What stocks are our experts looking at?

 

First, let’s establish context by evaluating recent-sector performance at large.

The ETF “ESPO” is the VanEck Vectors Video Gaming and eSports ETF. It’s a loose proxy for the gaming sector, as it holds heavyweights including NVIDIA, Tencent, Activision Blizzard, Advanced Micro Devices, Nintendo, Electronic Arts, Zynga, and Ubisoft, among others.

Below we see ESPO compared to the S&P here in 2020. While the S&P is down 7%, ESPO is up over 20%.

 

 

Now, as you might have noticed in describing ESPO, “gaming” relates to different types of companies — you have the game developers themselves (like Electronic Arts), the console developers (like Nintendo), and then the chipmakers (like Advanced Micro Devices). This gives investors plenty of ways to play this trend.

So, what stocks do our experts like?

For game developers, all three of our analysts are looking at Activision Blizzard.

Here’s Matt with the basics:

Activision Blizzard (ATVI) makes Call of Duty, World of Warcraft, Candy Crush, and other popular games. The stock is up 47% over the last 12 months. CEO Bobby Kotick recently said the company has 350 million users currently … and expects to hit one billion within five years …

For console developers, Neil likes Microsoft:

Microsoft (MSFT) in the Total Return Portfolio has its Xbox, the No. 2 gaming console system next to Sony’s (SNE) PlayStation. Gaming products, services and devices make up between 6%-9% of quarterly revenues for Microsoft.

So, on top of its Azure cloud computing and its ubiquitous software for remote work, games continue to be a good driver of revenue and growth. This is just one more reason to buy and own Microsoft.

Finally, for the related chipmakers, Eric is eyeing NVIDIA:

Nvidia started in the 1990s as a computer gaming-focused company, making specialized chips that could convert PCs into de facto advanced gaming consoles. Today, though, all roads lead to Nvidia.

Thanks to the company’s dominance of the GPU market, it is at the center of several powerful screen-time growth waves, including gaming, data centers, autonomous vehicles, artificial intelligence, and machine learning.

On a personal level, Matt writes in his update that he’s toying with the idea of buying his own gaming console. On that note, here he is with the final word:

… in addition to buying a gaming console sometime soon, I may be buying more gaming stocks as well. They’re certainly worth a look, as I expect the trend to stay strong for a long time to come.

Have a good evening,

Jeff Remsburg