Video Gaming Stocks In Red, Are ETFs Relatively Safe?

Feb 6 marked a terrible day for key video game companies, thanks to mixed earrings and wary outlook. Industry leaders lost heavily as Take-Two Interactive Software Inc. (NASDAQ:TTWO) was down 13.8% (the highest since December 2009) while Electronic Arts Inc. (NASDAQ:EA) was off 13.3% and Activision Blizzard Inc. (NASDAQ:ATVI) retreated about 10.1%.

The pure-play ETFMG Video Game Tech ETF GAMR lost about 2% on the day while VanEck Vectors Video Gaming and eSports ETF ESPO shed about 3.8% (read: Capture the eSports Craze with this ETF).

Inside the Earnings & Operating Pressure

Electronic Arts reported third-quarter fiscal 2019 earnings of $2.08 per share against the Zacks Consensus Estimate of $1.93. Revenues increased 11.1% year over year to $1.29 billion but lagged the guided figure of $1.38 billion and the Zacks Consensus Estimate of $1.80 billion. EA pointed out "intense competition" as the reason for the revenue miss, per CNBC.

Take Two Interactive Software reported third-quarter fiscal 2019 non-GAAP earnings of $4.05 per share compared with the Zacks Consensus Estimate of $2.75. Net revenues surged 159.7% from the year-ago quarter to $1.25 billion which missed the Zacks Consensus Estimate of $1.49 billion. It forecast revenues in the quarter ending March in the range of $450 million to $500 million, when analysts had guided $609.1 million.

Both companies appeared wary of threats from free-to-play games like "Fortnite”, a shooting game from Epic Games Inc. Reports dragged down Activision Blizzard too. Electronic Arts noted that its “[Battlefield V] launch didn't resonate as strongly.” It faced competition from the likes of 'Fortnite' or 'Red Dead Redemption 2' or 'Call of Duty.'

However, Take Two Interactive Software doesn’t feel any competitive pressure in the true sense as its “Red Dead Redemption 2" saw more sale in the first eight days than the original title sold in its first eight years, as quoted on CNBC.

Are Video Game ETFs Safe?

If investors are worried about the building competitive pressure on leading video game companies as indicated by Electronic Arts, the basket-approach of ETFs could be a solution.

These funds offer exposure to semiconductor stocks too that have put up a better performance on Feb 6 and thus the portfolio-approach mitigated some of the losses caused by video gaming stocks.

Investors can also tap the success of Fortnite through the ETF format. The company has Chinese social media giant Tencent Holdings Ltd. as a major shareholder and Tencent is the top holding (8.14%) of ESPO.

Also, some analysts are optimistic about the sector. Per Robert Berg of Berenberg, Fortnite’s growth momentum appears to be waning, which could augur well for other operators.

ETFs in Detail

GAMR tracks the EEFund Video Game Tech Index, which follows companies actively involved in the electronic gaming industry, including the entertainment, education and simulation segments. The 78-stock fund has exposure to the afore-mentioned stocks but no stock accounts for more than 2.98% of the fund. It charges 75 bps in fees.

The fund ESPO follows the MVIS Global Video Gaming and eSports Index, which intends to track the overall performance of companies involved in video game development, eSports, and related hardware and software. The 25-stock fund has 6.33% focus on Activision Blizzard while 5.67% weight went to Electronic Arts and 3.82% focus was on Take-Two Interactive Software.

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