Gaming - one year on

This is an update of our blog from a year ago on how gaming has become a main pillar of the entertainment sector.

Gaming stocks were big beneficiaries of the 2020 corona lockdowns. While still being far from normal, this past summer offered more alternatives in the entertainment area, enough to take some wind out of the sails of gaming stocks. Therefore, it is a good time to review the sector.

Since our analysis last year, we have expanded the number of stocks from the top 20 to top 30 globally. Europe “small” (stocks not included in the global top 30) are now 11 stocks, up from 7 last year. We consider the results to be more robust.

Unsurprisingly, the stellar growth outlook of 2020 looks more subdued now. As a consequence, valuation multiples have contracted from their “corona” highs, from 7.3x EV/Sales to 4.8x and from 18.1x EV/EBITDA to 14.1x for our global universe. There are some interesting differences by region:

Europe and China had the highest valuation and declined the most since last year. Most notable, while the reduced valuation was more or less in line with a reduced growth outlook in three of the four regions, Chinese gaming stocks devalued despite average upgrades to growth. A big part of this de-rating is surely linked to the crackdown by Chinese authorities on foreign listed Chinese stocks in general and the introduction of gaming restrictions in particular.

But how can growth expectations have stayed at +15% p.a. growth? We would venture two explanations: (1) China’s domestic consumption accelerated out of the corona dip earlier than the other regions, which also benefitted gaming, and (2) Chinese gaming companies are expanding globally acquiring other companies. Conversely, the growth estimates for US gaming stocks incorporate little inorganic growth.

A look at profitability also reveals some remarkable differences. While there seems to be no margin expansion potential at all for US players and only a bit for the Chinese, margins in Japan/Korea and Europe are expecting to increase. The growth-to-valuation picture based on operating profit is therefore somewhat different than based on sales:

In summary, China now looks to have the most attractive growth-to-valuation profile, while Europe remains the most dynamic region - dynamic in terms of growth, but also in terms of stock picking potential. While some big European players are down 50%, the most successful stock is up over 200%, which happens to be the only single stock we highlighted last year. It had just moved from microcap to smallcap and is now one of our Hanseatic Champions.

The HanseaticHunter #gaming #longtermpotential #growthstocks #esports #videogames #china #fortnite