(BFM Bourse) – Helped by the health crisis which has forced billions of people to stay at home, the video game sector has had an exceptional year 2020, and remains a promising theme in the future according to Saxo Bank experts.
The video game industry, which has greatly benefited from the containment measures linked to the coronavirus pandemic, has strengths to offer long-term performance, it is said at Saxo Bank.
To illustrate this potential, the Danish bank has just launched a thematic list of 30 securities in the sector, called Saxo Gaming, on which appear names well known to players such as the Japanese Nintendo, the Americans Activision Blizzard and Electronic Arts or the French Ubisoft. . There is also the Polish video game publisher CD Projekt, who recently made headlines for the dismal failure of his blockbuster CyberPunk 2077.
Exposure to the sector can also “be obtained through manufacturers of graphics cards, streaming, or even game developers” specifies the author of the note, the director of equity strategy of Saxo Peter Garnry, who includes in its list values such as the giants Tencent and Nvidia, online game publishers (Sea Ltd., NetEase, Zyga, etc.) and the Chinese e-sports streaming group Bilibili.
A very profitable industry
Driven by exceptional demand in 2020, these companies have recorded an average increase of nearly 37% in their turnover over the past year. Their combined EBITDA growth reached 59% for the year and analysts are optimistic, with an average price target of 16% above the current price. In addition, “while other high growth industries, such as e-commerce, with low margins, have difficulty generating significant cash flow, the gaming industry is profitable,” said Peter Garnry. . “The need for capital investment is low and income can easily be increased due to the digital nature of the sector,” the note further reads.
The profitability of the sector has also had the effect of attracting GAFAMs to this playing field (Microsoft obviously, but also Apple, Amazon and Alphabet). Competition is therefore likely to intensify but “it will be the same for the overall income of the market and analysts remain very positive about the 30 companies on our list” indicates the expert, who specifies that it should not be considered as an investment recommendation. And if past performances do not bode well for future performances, this list shows a spectacular “track-record” (+ 101% in 2020, + 772% over the last 5 years).
Biggest threat isn’t Disney but Fortnite for CEO of Netflix
The cancellation of sporting events and the closure of leisure areas, caused by the pandemic, have in fact “changed the rules for the video game sector” according to the expert, who emphasizes that “according to the figures on consumption video games, American adults would spend about 1 hour a day virtually socializing while playing. The streaming of esports (especially via platforms like Twitch) is also growing in popularity. As proof, in 2019 the CEO of Netflix claimed (already) that the main threat to the company was not Disney or HBO, but Fortnite, one of the most popular games in the world.
Driven by the popularity of smartphones as well as by the evolution of habits in terms of entertainment and socialization, the sector should also benefit from the progress of virtual reality and artificial intelligence and projections announce that in 2021, 2, 7 billion people will play video games on all platforms, according to Saxo Bank. Peter Garnry believes that “the gaming industry will continue to capture market share in the leisure sector.”
Risks to be taken into account
The pandemic has driven up the growth rates of video game companies and raised the price of their shares, as well as their valuation. While vaccination will allow many countries to reopen, “gamers are likely to prioritize physical socialization for a while and go out to restaurants or cafes, rather than playing video games. This could reduce turnover. sector for the year 2021 “warns Peter Garnry.
Another risk, coming from China: the introduction of new legislation to reduce the playing time of minors, since video games can create an addictive effect. “This new Chinese regulation first hit Tencent heavily, but the Chinese company was able to recover when the Covid-19 increased the consumption of video games by the elderly” observes the expert, according to whom similar regulations could be adopted in developed countries over time.
“The difficulty for video game developers to constantly renew themselves to produce new games is also a key risk to be taken into consideration” for Peter Garnry. The expert recalled that “there are several examples of developers who, after their heyday, had great difficulty in innovating”.
Large companies like Apple, Google and Amazon are also seizing market share in the sector by following in the footsteps of Microsoft (whose subsidiary Xbox Game Studios created in 1994 develops and publishes video games – we can cite the Age of Empires franchises, Doom, Zoo Tycoon or even Halo among the best known, Microsoft having also bought the publisher of Minecraft in 2014 – for platforms stamped Microsoft Windows or Xbox consoles). “With their huge distribution, these technological giants could become a great threat to existing developers and game platforms,” said Pete Garnry.
Finally, echoing the fever currently observed on the bond market, the expert points to the many stocks in the sector which enjoy a very good valuation. “This means that rising interest rates have a greater impact on the valuation of stocks, so the risk of rising interest rates in the United States should be a key factor for investors who want to gain exposure to the market. video game sector “he concludes.
Quentin Soubranne – © 2021 BFM Bourse