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11 November 2020Dissecting the Video Gaming Investment Opportunity (7:45)
John Patrick Lee, CFA
John Patrick Lee, CFA
Product Manager
With the video game industry projected to reach record-breaking revenues in 2020, Product Manager John Patrick Lee looks at what’s driving this growth and how investors can fit video gaming and esports into a portfolio.

Jenna Dagenhart: Digital games keep breaking records, and the industry could reach $159 billion in revenues in 2020. VanEck just published a new report, dissecting why video games and esports are more popular than ever, with an estimated 65% of adults playing video games. COVID-19 might be controlling crowds in person, but not online. In-game concerts and events are drawing millions of people into their favorite game's universe, blurring the line between the game and live events. The way people are playing is changing, too, with many people playing right from their smartphones. Since 2015, mobile revenues have grown at an annualized rate of 22%, outpacing the total gaming revenue's growth rate of 15%. Needless to say, this growing industry is reaching billions of consumers around the world. But if and when life does return to normal, gaming could be here to stay. VanEck finds that demographic shifts and changing consumer demands offer some long-term structural support.

With that, I want to bring in VanEck Product Manager JP Lee, who wrote the report. JP, there are a lot of interesting takeaways here, but let's start with recurring revenues and why they matter.

JP Lee: Recurring revenues are very important, and recurring revenues are when a customer spends money on the same game repeatedly over time. This is separate from any initial purchase to buy the game, and the revenues come in much smaller amounts. We're talking $5 to $10 per spend versus your traditional $50 per spend to buy the game. This is often called “game as a service” and in a lot of ways, it mimics aspects of a subscription service. The consumer spends money on digital items, like new costumes, which are called skins, new weapons, or it'll unlock features that the developer will roll out on a timed schedule. It's often called a “battle pass.” The new battle pass comes out every month or two and the customer spends 10 to $15. And again, it goes back to unlocking these digital items.

I think the key takeaways and the results of the recurring consumer revenue spend is that it extends the life cycle of the game. And as long as the publishers and the developers keep tweaking the game or adding new content, it gives the consumer an opportunity to spend more money.

The second thing it does is it increases the maximum amount of money a customer can spend on a single game.

The most popular games are either free by themselves or have free aspects. Fortnite made more money than any video game in a single year. 2018, it made about $2.4 billion. That's a free game. They get people in the door because it's free, and then the game is great, and then you're spending money, and that's the goal.

Jenna Dagenhart: And JP, mobile is the fastest growing segment of the market. How are companies capitalizing on this new way of playing?

JP Lee: Let's break it down. There are three main segments of the video game market. You've got your PC, which is people playing on their computers with their keyboard or mouse. Then you've got your console, which is people playing on their Xbox or their PlayStation or the Nintendo Switch. And then there's mobile, which is the youngest category by age, essentially started with the invention of the iPhone in 2007. Despite being the youngest in the category, it's now the largest segment, and it's now the fastest growing segment compared to the other two.

Let's look at some key takeaways for understanding the mobile market. First of all, mobile gaming means anyone with a cellphone now has revenue potential from the publisher's perspective. Everyone in the world basically has access to mobile technology now. Meaning that the entire population of the world is a potential gaming customer.

JP Lee: And point number two is mobile gaming is massively popular around the world, with representation from domestic markets like the United States and then also emerging markets like Southeast Asia and Latin America. Mobile gaming is huge, and a lot of the companies that are participating in this space are targeting emerging markets consumers, specifically on the mobile platform.

And then I think one thing to point out, too, is that mobile gaming is doing the same thing we just talked about. They're capitalizing on the recurring revenue business model with repeat spending from the same customers.

Jenna Dagenhart: And obviously, gaming is growing a ton, but how can people buy into these trends? What's the easiest way to invest when there're so many different players and products in the space?

JP Lee: We take a basket approach. We would recommend the MVIS Global Video Gaming and Esports Index. It is the global benchmark for the video gaming industry with over one billion in assets tracking this index. Let's look at some of the key features. Number one, and the most important, is probably the pure play rule. To be initially eligible for the index, a company must generate over 50% of revenues from video gaming or esports. Right off the bat, you're excluding Microsoft, Sony, Amazon, Google. All those companies make a lot of money from video games, but as a percentage of their business, it's not enough to pass the pure play rule. Then what do you include? You include video game publishers like Activision, Nintendo, even some of the chip makers who have a lot of exposure to the gaming space, like NVIDIA, AMD, those companies are included. That's step one, define the companies that are participating.

Step two is we're going to try to cover 90% of the available free float market cap of the investible universe. Step one is define who's eligible, and then step two is we're going to take the top 90%. What does that portfolio look like? I think the key thing here is it's a targeted, pure play exposure to video gaming companies. This is only including companies that are actually participating, and it leads to a low overlap with broad market indexes. Essentially, you're not getting this exposure in your broad market portfolio.

Where does this fit in a client portfolio? That's one of the main questions we get, where does this fit? And I think the easiest way to answer that is these companies are providing growth and their stock prices and their earnings and their earnings projections all reflect that. The index characteristics line up nicely with global growth portfolios and global indexes. When you look at things like what's the PE ratio? What's the valuation ratio? These are growth companies. Ultimately these companies can provide the potential to generate alpha against the broad market. As we've seen so far in 2020, as of the end of September, this group of companies can also act as a portfolio diversifier. This group of companies' stock price do not necessarily move in line with the market. As of the end of September, the S&P [500 Index] is up about a little over five and a half percent, the video gaming and esports index is up over 60%. It's a diversified portfolio play, and it has the potential to add alpha to a diversified portfolio.

Jenna Dagenhart: Well, great stuff. JP, thanks for joining us.

JP Lee: Thanks for having me. I really appreciate it.

Jenna Dagenhart: And thank you for watching. To check out the full gaming industry report, go to and be sure to subscribe for more insights from JP and VanEck's experts. I'm Jenna Dagenhart with Asset TV.