ETF Trends caught up with John Patrick Lee, CFA, Product Manager at VanEck to discuss video gaming and esports investing opportunities.
Were there any adverse effects of the COVID-19 pandemic on video gaming and esports, or were there only positive effects?
As widely reported in the media, video game stocks have weathered the storm and outperformed the broad market as defined by the S&P 500 and MSCI ACWI Indexes, thus far in 2020.
Video Game Stocks Outperforming Broad Market YTD
Source: Morningstar. Data from 12/31/19 – 6/30/2020. Past performance is not a guarantee of future results.
Video game engagement has broken records across a variety of metrics since the virus shutdown began. Esports recently set a world record for live TV audience with the eNASCAR races that were held in place of regular, live races. However, some esports leagues and tournaments have been put on hold. For instance, the League of Legends Mid-Season Invitational was cancelled due to travel restrictions put in place around the world.
After taking into consideration all aspects of the video gaming and esports ecosystem, we believe the effects of COVID-19 have been a net positive for both video gaming and esports. People around the world have been turning to video games to entertain themselves and each other online, and we view the spike in engagement as an acceleration of trends that have been in place for years.
The growth of the video games industry benefits game publishers, but who and what kind of business model benefits from esports?
We believe that video game publishers will benefit the most from the esports phenomenon, though keep in mind that esports revenues are still much smaller than video game industry revenues.
Video game publishers are uniquely positioned to benefit for a number of reasons:
- First, the publisher owns the rights to the game. That means that any time an esports competition is held, the publisher is paid for the rights to play the game in competition.
- Second, publishers have been launching their own leagues, such as the Call of Duty League (owned by Activision) or the Fortnite World Cup (owned by Epic). Any profits made by the league goes straight to the publisher.
- Third, media rights are set to become the largest esports revenue stream by 2022. If the publisher owns the rights to the game as well as the league’s media rights, it effectively owns the majority of all esports revenues.
- Finally, popular esports leagues or events may create a halo effect for a game and help boost sales. When a 16-year old from Pennsylvania wins $3 million dollars at the Fortnite World Cup, that generates headlines and social media chatter, which leads to more players in the game.
Besides video game publishers, what other types of companies may benefit from the growth of the video game industry?
The MVIS Global Video Gaming and eSports Index employs a pure-play rule, which means that a company must generate more than 50% of its revenues to be initially eligible for index inclusion. Starting with that framework, here are some different companies that are involved in the industry:
Semiconductors: Certain semiconductor companies, like Nvdia and AMD, generate revenues by building the graphics processing units (GPUs) that underpin the gaming experience. These chips are used in PC computers, consoles and cloud gaming platforms and facilitate a seamless gaming experience.
Streaming websites: Video game fans and content creators use streaming websites to post video game content and to follow their favorite content creators. Twitch.tv (owned by Amazon) is the most popular video game streaming website in the U.S, while China’s biggest streaming sites are Huya, DouYu and Bilibili.
Hardware: To play video games competitively, the majority of gamers use high-end hardware, including keyboards and headphones. Some hardware companies, like Turtle Beach, are heavily favored in the gaming and esports community and would be considered pure-play.
Investing in Video Gaming and Esports
Determining which games will become hits is difficult, so investors may wish to invest in a diversified basket of video gaming and esports stocks. Such an approach may allow investors to express a view on the sector without having to know which specific stock will outperform over the future. The index methodology which guides VanEck Vectors® Video Gaming and eSports ETF (ESPO) provides exposure to companies in the video gaming and esports industries.
Currently, the MVIS® Global Video Gaming and eSports Index is heavily tilted towards video game publishers (including the publicly traded companies that operate the largest esports leagues) and semiconductor companies. As the esports industry matures, smaller esports names, such as streamers like HUYA and Modern Times Group, could grow to become a meaningful part of the Index. In the interim, the index captures the esports phenomenon as part of the broader evolution of video gaming, creating awareness of the industry’s potential to reshape how people spend their time and entertainment dollars.
To learn more about ESPO and the high growth potential of the global video gaming and esports industry, visit vaneck.com/esports/.
Esports: Competitive gaming at a professional level and in an organized format (a tournament or league) with a specific goal (i.e., winning a championship title or prize money) and a clear distinction between players and teams that are competing against each other.
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