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The $100 Billion Cult: Video Gaming & Global Youth Culture

Kevin Cook
I'm not crazy about kids wasting hours playing video games, but there has to be a way to profit from it, for all of us.
  • (0:30) - Stock-Picking: Better Than Video Games?
  • (4:30) - Fortnite Battle Royale: Free Viral Mania Makes Millions   
  • (10:45) - Video Game Industry: Where $100 Billion Comes From
  • (14:30) - Amazon's Twitch Creates a Whole New World
  • (21:15) - Freemium Model: What Impact on Console Companies?
  • (30:00) - Future of Gaming, Augmented Reality, and Education
  • (33:10) - Episode Roundup: Podcast@Zacks.com

Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

This week in my Cook's Kitchen video blog, I did a little thing I called Stock-Picking is a Cult where my goal was to appeal to youth to put down the video game controllers (and their smartphones) to learn the best game on the planet -- playing the stock market and learning to create wealth.

While many in the world of markets think that the “FANG” stocks and their disciples are a cult, they are actually a subsect of a much bigger cult of investors who love the game of researching and buying companies to make their money grow. By the way, FANG stands for Facebook, Amazon AMZN, Netflix, and Google. I always throw NVIDIA NVDA in there too. And often Apple is included, thus FAANNG.

Many investors think they are “in the cult” of stock-picking, but they're really not. One way to know for sure is to ask them about the FANG stocks. If they wince or laugh, they probably believe the FANG stocks are just investing hype, a mere momentum fad.

And this means they are not really “in” the cult of stock-picking. Because they don't understand that these companies are powerful growth franchises capitalizing on megatrends in technology and consumer behavior.

Better Than Video Games?

In the cult of stock-picking, we have our own language, art, science, and rituals. Our own fanatics, extremists, charlatans and bad guys. It's a game of 3-D, 24/7 chess... played on surfboards.

I love to use the ocean as a metaphor for the stock market, as both are equally full of sharks, whales and other strange and diverse marine life in a giant, tumultuous ecosystem. And my mantra as a trader has always been "I'm just a surfer looking for the next wave, never blaming or hating the ocean for being itself."

The stock market is also a “game of thrones,” with kings and queens who control armies of tens of billions of dollars at companies and investment funds, making decisions that rule the fate of us commoners.

I cover all this in my video Stock-Picking is a Cult which you can also find on YouTube on the Zacks Investment News channel.

To me, stock-picking is truly the most fascinating, most complex game on the planet, full of way more surprises and wild randomness than any video game could offer.

That's why I am reaching out to Millennials through my work to convince them to learn my favorite game, the best game. One that could actually make them rich someday. One that will serve them their whole lives, as they learn to save and invest in world-changing companies.

I'd much rather see teens and 20-somethings learning the science and math behind video games. But if I can't convince them of that, at least come where the money is.

But maybe, just maybe, I'm missing something. That’s what I thought this week as I looked at some of the data. Because apparently there's a lot of money in video games... for somebody.

The $100 Billion Industry of Serious Fun

The video game industry hit $108 billion in revenues in 2017 and it's growing at mid-single digits overall, with high double-digits for some areas like free-to-play games -- which were connected to $82 billion in sales last year! And the new "esports" area is expected to hit $1 billion in revenues this year.

This cult of gaming is apparently not a fad either.

But I'm not giving up my strong views here just because of a few (dozen) billion dollars. I'm just thinking it's time for us in the "over-40" crowd of investors to learn more about the growth mania that is fueling new wealth in unheard of ways.

So I brought in our resident expert on all things youth culture, including gaming, Ryan McQueeney. Ryan has a daily live show here at Zacks called Free Lunch, which airs at noon ET on YouTube, Facebook, and Twitch.

And what really spurred my curiosity was an article Ryan wrote this week about something called Fortnite Battle Royale.

Be sure to listen to the podcast to hear all about it. Ryan and I also breakdown the mega-billion gaming industry to see where the money is going and where it's coming from.

I use an article from GamesIndustry.biz by James Batchelor that recaps the 2017 numbers based on report by SuperData that shows that mobile games remain the biggest segment of the market, generating $59.2 billion, followed by PC at $33 billion and consoles at $8.3 billion.

These few sentences from Batchelor's piece really put the Asia contribution to global gaming culture in perspective...

"The total money spent on mobile titles was also $14bn higher than in 2016, with Asian titles such as Tencent's TCEHY Arena of Valor and NetEase's Fantasy Westward Journey cited as contributors to the market's 31 per cent year-on-year growth.

"Asia remains the biggest market for mobile, generating $36bn in 2017 - a $10bn increase over 2016 - and expected to make $38.4bn by the end of this year. By contrast, North America and Europe generated $9.1bn and $5.9bn respectively in 2017."

The US Video Game Industry is Only $20 Billion

As an investor in companies like YY YY and Momo MOMO I knew that gaming culture and business were huge in China. But I had no idea that the US contribution was so small relatively speaking.

Given the growing dominance of mobile and free-to-play business models, I had Ryan explain the challenges and opportunities for big "console" companies like Activision Blizzard ATVI, maker of the Call of Duty series, Electronic Arts EA, maker of sports franchises like Madden NFL, and Take-Two Interactive Software TTWO, owner of Rockstar who makes Grand Theft Auto.

CNBC reported on Wednesday from the Delivering Alpha Conference in New York that hedge fund manager Samantha Greenberg is optimistic on Take-Two's upcoming games such as Red Dead Redemption 2 and she sees 40% upside for the stock. “Engagement with videogames continues to grow," she said. “While we’re bullish on the entire sector, we believe Take-Two has the biggest upside."

Hear Ryan's "gaming culture" views on these players in the podcast. He knows his games because what he said lined up pretty closely with the intro to a recent Goldman Sachs research report...

"While growth in mobile and PC games grabs headlines, don't count out the console as the centerpiece of electronic gaming. Masaru Sugiyama of Goldman Sachs Research explains how a shift to digital downloads, more portability and the rise of virtual reality may position consoles for years of growth."

Finally, Ryan gives us the scoop on the popularity and power of the live-streaming Twitch platform owned by Amazon. What I just found out (but forgot to ask Ryan about) wasMicrosoft's MSFT effort to compete with their new gaming platform, Mixer.

And Ryan also gave us a couple of stock ideas to close out the show. One of them has just exploded higher recently after the world discovered that Fortnite "celebrity" gamers were using their advanced audio headsets.

Turtle Beach HEAR designs and sells premium audio products for consumer, commercial and healthcare markets. Apparently their gaming headsets are must-have for creating a realistic, immersive experience, giving gamers extra-sensory capabilities in a sort of spatial surround-sound.

Get all the goods on gaming culture and related investment ideas in the podcast!

One last thought, since I’m a science and technology evangelist as well as a stock market fanatic. While I’d love for kids to spend less time playing video games and more hours learning about the science and math behind them, maybe there’s hope that what all these companies are doing will actually inspire more kids to seek a better, more advanced education.

One thing is for certain -- the technologies of tomorrow, from artificial intelligence to augmented reality, will revolutionize education with interactive and experiential learning opportunities you can only dream of right now. I know my favorite visionary leaders at companies like Alphabet, Microsoft, Apple, NVIDIA, IBM and Amazon are already thinking about and working on these things.

They should call me. I’ve got some great ideas for “massively parallel” math and science education. 

Disclosure: I own shares of NVDA, MOMO, and YY for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the Healthcare Innovators and TAZR Trader services. Click Follow Author above to receive his latest stock research and macro analysis.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
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Tencent Holding Ltd. (TCEHY) : Free Stock Analysis Report
Momo Inc. (MOMO) : Free Stock Analysis Report
Turtle Beach Corporation (HEAR) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Activision Blizzard, Inc (ATVI) : Free Stock Analysis Report
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Electronic Arts Inc. (EA) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
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