In early May, we wrote a piece on the out-performance of video-game companies, in which we noted how the unexpected demographic broadness of video game appeal is helping drive sales and engagement. We also mentioned e-sports — another aspect of video gaming that’s garnering investors’ attention.
E-sports is on the way to becoming a huge business, rivaling established sports leagues both globally and in the U.S. “E-sports” refers to multiplayer online games, such as League of Legends, Call of Duty, Counter-Strike, Overwatch or StarCraft, as competitive sports — complete with leagues, professional players, spectators, sponsors and box-office and advertising revenues. While the largest and oldest e-sports league organization is ESL (originally an acronym for “e-Sports League”), there are many events and organizers, still largely fragmented along game- and manufacturer-specific lines. While e-sports first took off in Korea, where they are already mainstream, they are expanding rapidly in the U.S., Europe and China.
How big is e-sports, now, and is competition with established sports (such as soccer, American football and basketball) becoming visible? Numbers are hard to come by for many events, but the 2016 League of Legends World Championship, organized by Riot Games, had 43 million unique viewers for its final game — compared to 40 million for game seven of the 2016 baseball World Series. League of Legends may have global reach compared to the relative parochialism of American baseball. But advertisers and sponsors will love the eyeballs, no matter where they’re found.
Trickle-Down Benefits
Direct e-sports market revenues — including sponsor, advertising revenues and ticket sales — were $900 million in 2016. That figure is relatively small, but it fails to capture some of the significant promotional benefits for game companies like Activision Blizzard (NASDAQ:ATVI) and Take-Two Interactive (NASDAQ:TTWO) in terms of the impact on game sales.
Recognition of e-sports is also rising. In 2013, the U.S. Citizenship and Immigration Services (USCIS) began issuing athlete visas to event participants in League of Legends events. The Asian Games will include e-sports as medal events beginning in 2022. Major European soccer clubs, including Paris Saint-Germain, have created e-sports teams and participated in e-sports events. The National Basketball League has announced that it will partner with TTWO to launch the company’s NBA 2K game as an e-sports league in 2018.
The main online outlet for e-sports viewing is Twitch.tv, which Amazon (NASDAQ:AMZN) bought in 2014, accounting for about 20% of all e-sports online viewing time in 2015. Alphabet (NASDAQ:GOOGL)'s (NASDAQ:GOOG) YouTube won ESL broadcast rights early this year. Facebook (NASDAQ:FB) struck a deal to live stream Valve’s Counter-Strike. But it isn’t just the internet giants getting involved; cable channels ESPN and TBS have also established e-sports programming.
The growing clout of e-sports will be a boon for game companies. Titles that gain popularity as e-sports venues will see extended game and franchise lifespan and higher sales; e-sports will become one of their main promotional tools. The impact on game producers can be profound; independent game studio Pyronix saw unit volumes of its Rocket League game exceed 10 million, largely thanks to e-tournament exposure.
Sports are changing. One Twitch channel had more than 200,000,000 views.
For the companies that broadcast and promote events, e-sports will create new sources of monetization through sponsor and advertising revenue, as well as through direct sales of event tickets and merchandising. If the 2016 numbers for League of Legends are an indication, e-sports are nearing a critical inflection point.
Investment implications
In our opinion, investors who want to benefit from the rapid rise of e-sports should concentrate in two areas: first on the game studios themselves, and second on the platforms that will bring e-tournaments to the new masses of fans. As we noted in May, the largest pure-play gaming companies are Electronic Arts (NASDAQ:EA, Take-Two Interactive and Activision Blizzard. Hong Kong-based Tencent (OTC:TCEHY) is the major gaming company in China, getting about half its revenue from gaming, supported by its other robust social and communications platforms. Amazon, Alphabet and Facebook are positioned to be major platforms for e-sports viewing and we would currently favor them above established cable broadcasters.
Our Global Outlook
After some end-of-the-quarter volatility, markets have settled down and continued to move ahead, offering investors a typical seasonal July rally.
The U.S.
We like the U.S., and in the U.S. we continue to prefer large-capitalization technology companies with disruptive stories and visible, long-term growth prospects.
Europe And Emerging Markets
We are neutral to slightly positive on European stocks. We are most enthusiastic about Asian stocks in manufacturing economies -- particularly China, Hong Kong, Taiwan, Thailand, Singapore, and India. Here as well, we like technology, and view some Chinese internet stocks favorably. (As usual, we caution investors that most of the Chinese stock market is driven by retail investor sentiment rather than by fundamentals.)
We find Brazil interesting in light of former president Lula da Silva’s recent conviction on corruption charges — although the long-running corruption scandal is still ongoing, President Temer remains under a cloud, having avoided impeachment thus far. Both the Brazilian stock market and the Brazilian currency could rally if and when market participants believe that the corruption scandal has reached its nadir.
Gold
Gold remains in a trading range. It has moved above 1240, but according to technical analysts, a close for gold above $1275 would signal the potential for a more significant rally.