Some Wide Moat Bargains Available in Video Game ETF

Somewhat quietly, video game stocks are notching impressive showings this year. Through May 10, the VanEck Video Gaming and eSports ETF (ESPO) posted a year-to-date gain of 11.53%, topping broader market and technology benchmarks along the way.

There is another point in the ETF’s favor. The video game industry is ultra-competitive. Fortunes rise and fall on consumers’ dedication to established franchises and willingness to embrace new games. However, some ESPO member firms can accurately be described as wide moat companies.

ESPO turns six years old in October. It follows the MVIS Global Video Gaming and eSports Index and is a pure play on video gaming and eSports. Why? Because that index mandates that member firms generate at least half their sales from those segments. The ETF holds 29 stocks, some of which currently sport attractive valuations along with wide moat credentials.

A Quartet of ESPO Holdings Looks Interesting

At least four ESPO member firms are wide moat names trading at attractive valuations. One of those four is China-based NetEase (NASDAQ: NTES). While that company’s DNA is rooted in mobile gaming, the second-largest ESPO holding is expanding into other areas. And those efforts could be long-term growth drivers.

While games will remain NetEase’s core cash flow driver, we think the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential. Cloud Village, the group’s music streaming arm, had over 200 million monthly active users in 2023 and remained the second-largest music streaming platform in China,” noted Morningstar analyst Ivan Su.

Electronic Arts (NASDAQ: EA), the producer behind the venerable FIFA, Madden, and Battlefield franchises, is ESPO’s sixth-largest component, commanding a weight of 5.66%. Electronic Arts is one of the dominant producers of multiplayer games. It has revenue opportunities that extend well beyond simply selling games to consumers.

“Online multiplayer games or game modes lead users to develop social networks. Thus encouraging player loyalty via either informal friendship networks or actual teams/clans. DLC can either refresh the multiplayer experience by introducing new maps and levels or by prolonging single-player engagement by extending the storyline,” observed Morningstar’s Michael Hodel.

Grand Theft Auto publisher Take-Two Interactive Software (TTWO), which accounts for 5.09% of the ESPO portfolio, is another wide moat video game stock and one that trades at noticeable discounts. Like rival Electronic Arts, Take-Two is a force in the multiplayer space, indicating the company has revenue opportunities beyond initial game sales.

“Take-Two introduced a separate multiplayer mode, GTA Online, with the launch of GTA V in 2013. The mode has helped this installment sell over 145 million units by expanding its life cycle and monetization. GTA V launched onto its third generation of consoles in March 2022, likely pushing the potential launch of GTA VI out into fiscal 2025,” added Hodel.

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