Digital games sector grabs investors' attention

The digital games and interactive media sector, which remained under-appreciated by many, has captured growing investor interest during the COVID-19 pandemic, according to Nucleus Wealth’s head of investments Damien Klassen.

However, he stressed, some investors seemed to forget that this sector was booming even before COVID-19 with US$120 billion in earnings in 2019 and there were a number of key trends that supported this growth.

First of all, the sector was helped by the emergence of eSports, with the global audience growing to US$450 million worldwide in 2019, up 15% year-on-year. Secondly, the games sector was also helped by the move to mobile as historically it was mostly associated with PCs and then consoles but today mobile games generated almost twice the revenue of PCs and consoles combined.

Also, broadening demographics bucked the trend as previously the sector was associated mostly with adolescent boys, but women currently made up almost 50% of overall gamers while the sector saw the average user age going up to 35.

On top of that, market saw an evolution of the business model from initially game designers pursuing a traditional software purchase model with dollars paid upfront while now games have no upfront costs but use in-game purchases to generate revenue instead.

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In terms of geographic trends, more than two-thirds of digital gaming revenue is generated in Asia, with the increasing affluence in China and emerging markets being another key driver of growth.

However, for investors Klassen said there were a dearth of investment options in this space in Australia, with the only real candidate being Aristocrat if micro-caps below a market capitalisation of $50 million were excluded.

“The current high valuations these stocks are being accorded globally reflect strong market interest, although it remains a sector that’s under-appreciated by many investors,” he said.

“For the brave-hearted, there are four micro-cap options (see Appendix A). But remember, they are mostly early stage and capital hungry. They should be regarded as venture capital stage opportunities, not dissimilar to listed bio-techs, where the risk to capital is high because you are more exposed to the success or failure of an individual game than the industry’s growth.

“There’s also the option of investing offshore, with US-listed video game companies such as Activision Blizzard, Take-Two Interactive providing a pure play, or, for a more diversified exposure, via a Sony, Google, Apple and Microsoft, with all four having significant exposure to the growth of gaming.

“For a more targeted Asian focus investors could target some of the big Chinese stocks such as Tencent Holdings. But buyer beware. There is political risk in these stocks as the situation currently unfolding with TikTok highlights,” Klassen advised.