eGaming stocks haven’t performed well in recent years even as the global gaming industry has grown exponentially. The global gaming market is expected to reach a staggering $230 billion in 2023, representing an impressive Compound Annual Growth Rate (CAGR) of 6% over the last four years, with eGaming accounting for the majority of this.
The bulk of companies with exposure to this sector saw a surge during the pandemic, only for much of these gains to be lost during 2022. Why did the sector underperform and can it recover?
Why the disconnect between the sector performance and company share prices?
Firstly, it’s worth noting that eGaming stocks don’t just serve retail consumers. There are professional eSports tournaments that attract millions of viewers worldwide and generate significant revenues from viewership subscriptions and sponsorships from leading brands across different industries.
Of course, retail consumer demand is a significant factor too and the industry’s ability to quickly adapt to meet their needs has placed it in good stead. For instance, the industry has been quick to adopt Virtual Reality-based (VR) games as the technology has gained traction.
The sector enjoyed significant growth during the pandemic because it was unaffected by restrictions, being able to operate virtually. This has been a reason for its outperformance during the pandemic. However, it is also the reason why the sector has underperformed in the past 12 months, as investor money has chased ‘re-opening plays’ such as travel stocks.
eGaming stocks on the ASX and elsewhere have not performed well
There are only a handful of eGaming stocks on the ASX, although they tend to be small caps as opposed to some overseas’ peers.
Nevertheless, some of them enjoyed significant growth during the pandemic. One such company is Playside Studios (ASX:PLY) which is a games developer. It listed at 20c a share, grew seven-fold after its IPO, is currently trading at 48c a share and is still valued at a hefty premium to its IPO price.
Another example is iCandy Interactive (ASX:ICI), which is also a games developer. It too enjoyed growth during the pandemic, but it has given up the bulk of its gains.
eGaming ETF’s are a good option
The hype surrounding eGaming stocks led to the formation of two ASX ETFs – Betashares Video Games and Esports ETF (ASX:GAME) and VanEck Video Gaming and Esports ETF (ASX:ESPO). These ETFs are down 10% and 24% since their respective inceptions during the pandemic.
The GAME & ESPO ETFs offer exposure to larger eGaming stocks on overseas markets. Some of the top companies owned by these ETFs are Nintendo (TYO:7974), Netease (HKG:9999), Tencent (HKG:0700) and Nvidia (NDQ:NVDA).
Despite all these companies being multi-billion dollar corporations, they too have endured a difficult 12 months, declining by over 10% each.
Can eGaming stocks recover?
While the short-term appears uncertain, we think that plenty of eGaming stocks present fantastic opportunities for long-term investments. We take heart in the industry’s long history of innovation and consequential shareholder value creation over five decades.
However, we think investors are better off investing in the larger global companies, rather than the smaller companies on the ASX. This is because the larger companies will capture a larger share of the value that will be created.
Additionally, as the saga of Animoca Brands illustrates, overseas markets typically place substantially higher valuations on these sorts of companies. Animoca Brands delisted from the ASX in March 2020 at a measly $120m valuation and is now privately held. In its latest investment round, in September 2022, the company was valued at $5.9BN (!). It just goes to show that the ASX may not really know how to value these types of stocks.
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