With fast-growing global revenue and a rush of technology and consumer-products companies jumping in to get a piece of the expanding market, esports has become a hot topic in tech and entertainment. Strange as it might sound, coverage of other people playing video games has already demonstrated an impressive pull as spectator entertainment content -- and it has a huge runway for growth. Before taking a closer look at each of these esports players, let's establish some foundations about the space and why it looks like it deserves attention from growth-focused investors.
Image source: Getty Images.
How fast is esports growing?
The market for video games as spectator entertainment is expanding at a rapid clip, but it's still young and waiting to be defined in many respects. Research firm Newzoo reports that the worldwide esports audience hit 380 million viewers in 2018, and it projects that the total viewer base will hit 557 million by the end of 2021. A report from Goldman Sachs suggests that esports revenue could climb from $869 million in 2018 to $2.96 billion in 2022. The relatively nascent state of the industry makes growth difficult to forecast, and projections tend to vary a great deal depending on how they define the market and other factors. However, most expectations point to rapid growth.
If you were to type the name of a major consumer brand, fast-food restaurant, or a seemingly unrelated tech company into your search browser along with a query for "esports," it might help put the momentum behind professional gaming in perspective. McDonald's is betting big on esports as a marketing opportunity. PepsiCo has a range of esports sponsorship projects across its drink and snack portfolio. Sneaker and sports apparel giant Nike also has a line of esports sponsorships. Comcast is building a $50 million esports stadium in Philadelphia. And that's just a small slice of what non-gaming companies are up to in the space.
Nearly a billion people already watch gaming video content, presenting a huge audience that's yet to be reached, and businesses are still working out the best ways to establish and expand their esports ventures.
How does esports make money?
Esports content can make money through broadcast licensing deals, merchandise, live-event ticket sales, sponsorships, advertising, and other channels. Companies can also sell exclusive rights to esports teams, just as Activision Blizzard did with its Overwatch League and Call of Duty League. The company reportedly netted $20 million per team for the first seven teams in the Overwatch League, and ESPN reported that rights for expansion slots in the league went for between $30 million and $60 million per team. ESPN also reported that Activision Blizzard likely received $25 million per team for the first five slots sold in its recently launched Call of Duty esports league. All together, the company has brought in roughly $500 million just from selling team rights across these two esports leagues.
In addition to attracting sponsorship deals and third-party advertisers, the fact that competitive gaming leagues function as advertisements for the underlying titles has the potential to be a major positive catalyst for companies.
Esports and gaming video content already have a large audience, and there's a lot of opportunity to continue expanding the reach and developing the content and marketing so that it is more lucrative. At a time when the cost of producing new films and television series is being bid up by competitors seeking to augment their product ecosystems through the appeal of exclusive content, esports entertainment is relatively inexpensive to produce and can generate superior levels of engagement.
Who is esports investing for?
The esports space won't be a great fit for every investor. The market is still young, and that means that it's likely to see some significant twists and turns. Individual companies and projects within the space could have high failure rates, and more risk-averse investors might find the esports business to be unappealing for that reason.
The video game industry as a whole tends to be higher risk than the market at large. However, it's also true that for many of the top companies in the space, esports is only one component of a bigger business. Today's big publishers are typically profitable and have other growth avenues outside of the esports space, so they have some time to let their esports strategies unfold. Most large and well-established video game companies are looking to esports as a new growth engine. It's important to keep in mind that we're still in the early days of pro gaming as an industry.
Still, even more conservative investments such as telecoms like Comcast and AT&T will have some overlap with the esports space -- as both these companies have entertainment industry components and play a role in distributing third-party content to users through internet service. Investors who own a diversified portfolio of stocks probably already have holdings in companies with at least a small degree of exposure to the esports market.
How to evaluate esports companies
Most companies aren't currently breaking out detailed sales and earnings data for their esports ventures, but investors can still look at a business' overall revenue and profitability in order to better inform their investment choices. The metrics detailed below should provide investors with some weighing tools to assess companies in the esports space.
Revenue and earnings growth
Revenue is the amount of sales generated across a given time period, and revenue growth is simply the rate at which sales have increased across comparable points. Earnings are calculated by subtracting a company's expenses from its revenue across a given time period, and comparing the profits generated across stretches of time can reveal how fast a company is growing relative to its competitors and provide information about how its stock is priced relative to other companies on the market.
Esports and gaming video content will still be a relatively small portion of most companies' revenue and earnings, so investors will want to keep an eye on company updates and indicators like overall market growth and viewership metrics that can help give you an idea how individual projects and the overall space are performing.
Measuring the amount of sales and earnings that are being generated from the esports business can be easier or more difficult depending on the company. The esports and gaming video content contribution will be easy to measure for a relatively small company that generates all or most of its revenue from gaming-content streaming. Tracking the esports part of the business typically becomes much more difficult when you're dealing with massive tech and multimedia conglomerates.
Investors should keep in mind that they're not just investing in a company's esports business. Overall business performance will determine stock performance over the long term, so it's important to think of the companies you invest in holistically.
Price-to-earnings ratio (P/E)
Using the price-to-earnings ratio can be a helpful way to gauge how expensive a stock is because it compares the stock price to how much profit a company is bringing in. P/E is calculated by dividing a company's share price by its earnings across an annual period. Investors can use earnings from a completed fiscal year, the previous twelve months worth of earnings reports, or projected earnings based on either company or analyst targets.
The P/E ratio can be thought of as representing the number of years it would take for a company to generate profits equivalent to its current share price if earnings were to remain constant. Earnings will tend to fluctuate, and the importance of earnings growth in the P/E dynamic helps explain why investors are willing to pay more a company that's rapidly expanding its profits. Investors will often look for stocks that are increasing their earnings at a percentage that's greater than their P/E value, although it's also important to take factors like dividend yield and long-term business viability into consideration.
Most companies that have big exposure to the esports space will be video game and technology businesses. Companies in these categories tend to be growing relatively fast compared to the rest of the market, and this growth is generally expected to continue -- so they tend to have P/E ratios that are higher than the overall market average. Thus, it makes more sense to compare the P/E ratios of companies that have a good deal in common.
Price-to-sales ratio (P/S)
Not every company you look at will be profitable, and sometimes the earnings so small or irregular as to make the P/E ratios poor valuation guides. In these instances, dividing a company's valuation by its annual revenue will provide you with a P/S metric that can be compared against similar companies. Many companies in the video game industry have been operating for decades and are now regularly profitable, and the P/E ratio will often be more helpful for comparing stocks in the gaming and esports spaces because profits tend to have a closer relationship with a company's stock price than revenue. However, the P/S ratio can still be useful and can be an especially effective way to measure younger companies or those that have hit a rough patch and aren't generating profits.
There are plenty of other helpful metrics that investors can use to analyze companies, but the ones listed above should provide some basics for evaluating businesses and stocks in the esports space. With that taken care of, let's get on with our look at top investment candidates in esports.
Top esports stocks
|Key Strengths||Big Franchises|
|Activision Blizzard (NASDAQ: ATVI)|| ||Overwatch, Call of Duty, Starcraft, World of Warcraft, Hearthstone, Diablo|
|Tencent Holdings (OTC: TCEHY)|| ||League of Legends, Honor of Kings, Player Unknown's Battlegrounds, Fortnite|
|Take-Two Interactive (NASDAQ: TTWO)|| ||Grand Theft Auto, NBA 2K, Red Dead Redemption, WWE 2K|
|Electronic Arts (NASDAQ: EA)|| ||FIFA, Madden, Battlefront, Star Wars, Apex Legends|
|Huya (NYSE: HUYA)|| ||N/A|
Image source: Activision Blizzard.
Activision Blizzard has made a more aggressive push into esports than most other video game companies. The publisher's enthusiasm makes a lot of sense. It's got an impressive history of building highly engaged communities around its titles, and it owns a range of original properties that are a natural fit for professional competitive gaming -- including Overwatch, Starcraft, and Call of Duty. So far, Overwatch has been leading the company's esports charge.
Activision Blizzard launched Overwatch League (OWL) in 2018, and the company reported that the competitive gaming league for the franchise was profitable in its first year in operation. That's an impressive achievement, and there are many ways in which the game's esports league looks to be ahead of the curve. OWL's offering is one of the most advanced and well developed in the esports space, and it's setting the standard in terms of major broadcast coverage.
Activision Blizzard has a multiyear deal with Disney to broadcast professional Overwatch matches on networks including ESPN, ABC, and the Disney Channel. OWL has actually already been broadcast in a prime-time slot on ESPN, and 2018's Overwatch League finals managed to sell 20,000 tickets and sell out seating at the Barclays Center for a live event.
It's still early days in the esports space, but there's a lot to like about what's been accomplished with Overwatch League. Activision Blizzard reported that viewership for the league's first week in the 2019 season increased 30% compared to opening-week viewership for the debut season, and OWL teams will start regularly playing games in their home areas in 2020. This transition to a home-away, city-based system that more closely resembles traditional sports leagues could help to encourage regional interest and rivalries and is a type of system that could be very important to the growth of esports.
The company is still just getting started in esports, but what it's accomplished so far has been impressive and it's got a lot of great franchises that could help build its position in the space. The gaming giant is launching a professional, city-based Call of Duty league that's loosely modeled after what it's built with Overwatch esports, and it will likely continue bridging other big competitive franchises to this type of city-based system. Activision Blizzard's games have consistently ranked as some of the most watched on Amazon's Twitch platform, and it's been one of the most proactive among the major Western video game publishers in building the league structures that could be the key to taking esports to the next level.
Image source: Riot Games.
Tencent is a Chinese tech and media giant that's highly diversified, and the business' performance will be affected by a wide variety of projects and investments in areas outside of gaming and esports. At the same time, few competitors have an edge over the company in either of those categories.
Tencent's status as a massive media conglomerate makes it a great way to invest in the overall momentum of video games and esports. The company's wide array of internet platforms and media properties makes it a formidable player in the broader tech space, and it holds sizable investment positions in some of the biggest players in gaming content. Those seeking a more diversified way to ride momentum in the category will get that with Tencent.
The company owns stakes in gaming companies including Activision Blizzard, Take-Two Interactive, Ubisoft, and Glu Mobile. Tencent Holdings also owns a substantial stake in Huya and Douyu -- Chinese platforms for streaming video game broadcasts. The breadth of its investments and the strength of its own internal development and publishing studios combine to give the company a leading position in esports and gaming.
Among its many gaming resources, Tencent owns Riot Games -- the developer responsible for the hugely successful action-strategy game League of Legends. The title launched in 2009 and has amassed a large viewing audience that's played a big role sustaining the game's popularity and shaping the evolution of the esports industry over the last decade.
2018's League of Legends Championship Finals saw nearly 100 million unique viewers across its duration, and finals for the game's Champion Series tournaments have sold out at venues including Madison Square Garden in New York and the Staples Center in Los Angeles. Tencent is also responsible for Honor of Kings, one of China's most successful mobile games. Between those two titles, the company has led and expanded the Chinese market for action-strategy games and dominated its esports space.
Tencent's esports and gaming video content reach isn't limited to those genres, though. It also publishes popular entries in the battle-royale genre that's all the rage in the gaming industry right now including Player Unknown's Battlegrounds and Fortnite.
The Chinese multimedia giant owns a 40% stake in Epic Games -- the developer responsible for the hugely successful Fortnite. Epic is looking at esports as the next big step for Fortnite's evolution, and with hundreds of millions of registered players, there's an exciting foundation to build on there. The developer has set up an extensive tournament schedule for 2019 -- with a whopping $100 million prize pool that makes it clear that Fortnite is receiving a serious esports push.
Tencent owns at least a piece of many of the most popular games in the world -- and its core games like Fortnite, Honor of Kings, and League of Legends alone boast hundreds of millions of monthly players. Further strengthening its hand, Tencent can use its WeChat social media platform to feature and distribute content and take advantage of payment processing for in-app services and advertising opportunities. It can use strength in gaming and esports content to bolster its position in cloud services -- and vice versa. Esports is a very small part of Tencent's business right now, but there's a lot to like how it's fitting into the overall puzzle.
Image source: Take-Two Interactive.
Take-Two's esports push is at a less developed stage compared to companies like Activision, EA, and Tencent. However, it's got some promising things in the works, and there's considerable appeal in the thought of what the company's top studios might be able to accomplish in the competitive gaming space.
Take-Two Interactive's standout development unit over the last two decades has been Rockstar Games -- which actually consists of a series of studios united as a publishing family. Rockstar is responsible for big series like Grand Theft Auto and Red Dead Redemption and has been one of the most consistently successful development houses in the gaming industry over the last two decades. The developer has yet to make a big push into professional gaming offerings, but the possibilities of what it could come up with are intriguing.
The developer's hugely popular Grand Theft Auto series hasn't waded into the world of esports, but the series' most recent entry's online mode had fantastic player engagement and was hugely successful -- suggesting big esports potential. Having a large player base for the underlying franchise is a big asset for esports leagues because players are much more likely to be viewers.
Grand Theft Auto is a massive franchise commercially and has shown that it can incorporate a wide range of multiplayer gameplay experiences and be a draw on platforms like Amazon's Twitch. Grand Theft Auto V shipped over 100 million copies and had one of the most successful online modes of the last decade, but for now, there are no concrete indications about what Rockstar might do in the pro gaming space.
The company is actually using its NBA 2K basketball series to spearhead its push into esports, and the hugely popular series has a lot of potential in the fast-growing content category. There's a lot of crossover between the sports and gaming audiences, and Take-Two's basketball franchise makes a natural fit for the world of esports. NBA 2K19 set sales and engagement records for the series, and it came in as North America's third-best-selling game in 2018, so there's clearly momentum behind the property.
The NBA 2K League is a collaboration between Take-Two and a growing number of NBA teams. The company also has an NBA 2K Online league built around its free-to-play basketball series for Asian markets. The company's NBA 2K Online franchise is China's top sports franchise on PC, and the property has amassed a registered user base of more than 40 million people across its two mainline entries. It's reasonable to expect that Take-Two will be able to continue growing esports business across its basketball games and other sports titles. The company is also ramping up its presence in the mobile gaming, and it's highly likely that the company will venture into the mobile esports space within the next decade.
Image source: Electronic Arts.
There's already a lot of crossover between the audiences of sports leagues and video game enthusiasts, and Electronic Arts' strong position in licensed content gives it the potential to tap into existing fan bases and develop new ones. Madden and FIFA stand as some of the biggest franchises in gaming, and EA has been scoring some big wins and making some intriguing moves to turn these properties into esports mainstays.
Madden tournaments have been broadcast on networks including the CW and ESPN, and ESPN has a multiyear contract to broadcast coverage of the long-running football series. EA also recently signed a deal with Fox for broadcast rights for FIFA esports through 2026, with matches and other coverage set to be carried on FS1 and FS2 networks.
EA has taken a different approach to esports with its premier sports franchises than many of its competitors. Instead of focusing on professional leagues, it's made tournaments accessible to all players. This setup can bring in a massive audience that's then whittled down to the top players who compete in the higher-level tournaments. The approach is pretty interesting because it directly encourages player engagement -- and therefore also in-game spending. Most developers and publishers hope that esports leagues will cause more people to pick up their games, but EA's system of giving average players an opportunity to compete does so in a more direct way.
It's worth noting that many of the company's biggest titles are built around either sports licenses or licenses from other company's intellectual properties, such as Disney's Star Wars. This suggests that EA could have a smaller opportunity to expand its esports-related merchandising efforts and may have less control over the evolution of professional gaming leagues to due to the input from organizations like the NFL and FIFA.
However, EA does have some compelling original IPs that could see long-term esports success. The company's Apex Legends has built a massive player base and secured a spot at ESPN's 2019 X Games event, and management has indicated that it has other big esports plans in the works for the title. The Battlefield franchise has also historically been a strong seller and evidenced a lot of staying power and could receive a big esports push.
Image source: Getty Images.
Huya is a Chinese gaming video content streaming company and has often been called "the Twitch of China" because it's basic product offering is similar to Amazon's platform for streaming gaming videos. The company runs a streaming platform that allows users to broadcast their gaming sessions to large audiences of social media users. Huya makes money by allowing viewers on its platform to tip broadcasters and taking a portion of the contributions. It also has a small but fast-growing advertising segment.
The company managed to increase its sales 113% year over year across 2018 to hit revenue of roughly $678 million, and it looks like the esports player is on track to continue delivering rapid sales growth. Huya is a relatively young company, but it looks like the business should be able to continue delivering rapid sales growth and shift into delivering regular profits. Promoting esports content was one of the driving factors in the company's sales and marketing expenses more than doubling in 2018.
In addition to user broadcasters, the company is also signing exclusive deals with esports leagues, tournaments, and organizations for coverage and hosting its own events. It's ramping up investment in esports tournaments, has a partnership with Activision Blizzard for broadcasting Overwatch League -- and even owns a team in the league. It's also seeing strong momentum for user-organized esports tournaments. The company broadcast roughly 400 esports tournaments in 2018, totaling live viewership of roughly 1.6 billion.
China is already one of the biggest markets for esports content, and it will play a key role in the growth of the overall professional gaming and gaming video content industries. That means that Huya stands out as the best way to invest purely esports and gaming video content and its stock stands to see the biggest swings in relation with overall industry trends. Few other companies will better reflect the rapid growth for gaming video content in terms of sales and earnings growth than Huya, but investors should proceed with the understanding that there are big expectations, and there could be some bumps in the road.
Esports growth is just getting started
The NFL's Green Bay Packers were founded in 1919, baseball's Boston Red Sox got their start in 1901 -- Activision Blizzard's Overwatch League had its first season in 2018. While esports has come a long way in a relatively short time, it's still very young content category with tons of untapped potential. That makes it an exciting, risky, and potentially very profitable area to be investing in. It's reasonable to expect that companies will hit bumps in the road and face challenges in developing their esports businesses, but approaching the video game industry and esports investments with a buy-to-hold mentality opens up the potential to deliver big returns if they continue on their current trajectory.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keith Noonan owns shares of Activision Blizzard, AT&T, Take-Two Interactive, and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Take-Two Interactive, Tencent Holdings, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool recommends Comcast, Electronic Arts, and HUYA Inc. The Motley Fool has a disclosure policy.
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