Some fund managers think gaming stocks still have significant room to grow, with many viewed as undervalued
Lina Saigol, MarketWatch | April 29, 2020 | SmallCapPower: People around the world are turning to fan-favorite games like Assassin’s Creed and Prince of Persia to pass the time during lockdown, firmly placing gaming companies in the ‘buy’ column for some of the world’s most well-known fund managers.
(The following article was originally published on marketwatch.com on April 28, 2020)
Investment trust managers in the U.K. are tipping the industry as coronavirus-proof, as video games easily continue sales in this new reality that has negatively impacted other forms of entertainment, such as cinema and theater.
The total U.K. video games market, including buying software, consoles and online gaming, hit £5.35bn last year, according to figures published last week by the Association for U.K. Interactive Entertainment.
In the U.S., spending on video games in March rose 35% year-on-year to $1.6bn, while all video game categories experienced double-digit sales increases over the month, according to market research company The NPD Group.
NPD, which tracks U.S. consumer spending on video games, said last week that Animal Crossing – Nintendo’s latest release for its Switch console – had taken the top spot as the best-selling title in March, beating 2019’s most popular game, Activision Blizzard’s Call of Duty: Modern Warfare.
Investment trust managers have argued that the gaming industry still has significant room to grow and with many of the stocks viewed as undervalued, they are seizing the opportunity to invest.
Speaking to trade body, The Association of Investment Companies, here is what they said:
Walter Price, Portfolio Manager of Allianz Technology: “We think this is an undervalued part of technology and we like all the stocks to varying degrees. The event of Covid-19 has emphasised to some very powerful tech companies the value of diversified revenue streams and we think the game companies are undervalued relative to their diversification value.”
Paul Johnson, Gaming Analyst for Polar Capital Technology Trust: “We hold a position in Microsoft Corp. (NASDAQ:MSFT) as well as several video game publishers which stand to benefit. We believe that higher engagement will translate into higher monetization and the early signs are promising if third-party transaction data aggregators are to be believed. Given shelter-in-place orders, we also anticipate an inflection in digital downloads which have better economics for Microsoft and the publishers than physical sales.”
Harry Nimmo, Manager of Standard Life UK Smaller Companies Trust: “There are now a good handful of video game-exposed companies listed in the U.K., but we believe Team17 is one of the lower-risk models. They are a developer, but focused on lower-budget ‘indie’ games, and work with a lot of third-party developers where they have a revenue share model. This means that there is very low capital at risk from the success or not of a particular game, with game budgets typically under £1 million. Team17’s revenue stream is very diversified, and there is still significant revenue driven by back catalogue titles – they were the creators of Worms for example – where they continue to innovate on successful brands.”
Alexander Windsor-Clive, Analyst for Lindsell Train Investment Trust: “We believe that Nintendo will continue to flourish in the long term, driven both by trends in the industry and the enduring resonance of its ubiquitous intellectual property, which has entertained quite literally hundreds of millions of people across the world over a multi-decade period. Companies like Nintendo with dominant intellectual property are best placed to capitalise on the digital shift and future innovations in the sector. Developments in cloud gaming, virtual reality, augmented reality and esports are still nascent but have the potential to fundamentally reshape the industry.”
Joe Bauernfreund, Investment Manager of AVI Global: “We view Sony’s gaming segment as one of the four crown jewels of the empire, with the other three being semiconductors, music, and pictures. The heart of our investment thesis for Sony is that the complex conglomerate structure serves to mask the value of the separate underlying businesses, each of which are highly attractive in their own right.”
Greg Herr, Co-Portfolio Manager of Alliance Trust: “With new markets opening up across the world, and the proliferation of mobile devices, we believe the scope for expansion within the video gaming sector is substantial. In the current environment, with millions of people across the globe confined to their homes in the battle against COVID-19, the scope for increasing use of video gaming is huge.”
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