The Association of Investment Companies (AIC) has asked several investment managers whether investing in gaming companies like Nintendo or PlayStation may offer substantial returns for investors in the current Covid-19 climate and in the long-term.

Last year, the home video game console PlayStation celebrated its 25th anniversary. There has been massive change in the industry since PlayStation’s launch in 1994. The video games console has become extremely profitable for companies such as Sony and Nintendo, as well as US-listed software firm Electronic Arts (EA).

“Chinese gamers have opened up a new frontier in the industry and raised the potential audience for games exponentially: most of China’s 800 million-plus internet users use mobiles, for which many of these games are developed. These days you do not need a pricey console, you can play online with anyone in the world using just a smartphone,” says US funds data and research firm Morningstar.

For investors looking to access the trend, choosing funds with exposure to the industry is the least risky route. Indeed, if you own a technology or Asia fund – you are already indirectly exposed to the industry.

Walter Price, portfolio manager at Allianz Technology believes the scope for increasing video gaming is “huge.”

“We like video games for cyclical and secular reasons. Cyclically, Covid-19 has reactivated latent gamers as time at home is being filled by playing games by many. Secularly, the new console cycle in the fourth quarter of 2020 and the growth of streaming platforms that enable easier game play from the cloud will attract new game players who are both hardcore and casual.

“We think this is an undervalued part of technology and we like all the stocks to varying degrees. The event of Covid-19 has emphasised to some very powerful tech companies the value of diversified revenue streams and we think the game companies are undervalued relative to their diversification value.”

Alexander Windsor-Clive, analyst for Lindsell Train Investment Trust, says: “Covid-19 has been a mixed bag for the operations of Nintendo. On the plus side, the lockdowns that have been implemented across the world have fuelled greater engagement with video game content; Animal Crossing is a Nintendo title that has performed particularly strongly in this period. On the other hand, the increased demand has met some issues with supply, given the effect of the COVID-19 outbreak disrupting global supply chains, thereby hindering production and distribution of Nintendo’s Switch console and games.”

Video game-exposed companies

Harry Nimmo, Manager of Standard Life UK Smaller Companies Trust, said: “There are now a good handful of video game-exposed companies listed in the UK, but we believe Team17 is one of the lower-risk models. They are a developer but focused on lower budget ‘indie’ games, and work with a lot of third-party developers where they have a revenue share model.

“This means that there is very low capital at risk from the success or not of a particular game, with game budgets typically under £1m. Team17’s revenue stream is very diversified, and there is still significant revenue driven by back catalogue titles – they were the creators of Worms for example – where they continue to innovate on successful brands.”

The gaming industry – “the largest and fastest growing form of media”

Paul Johnson, gaming analyst for Polar Capital Technology Trust, concludes that video games have most definitely gone mainstream.

“Investor perception of the industry was gradually shifting from a volatile, hit-driven business to a stronger franchise business, where successful games can grow with each iteration, while generating recurring revenue in between with regular content updates. However, the strength of the franchise model was tested in 2018 by the phenomenal rise of Fortnite, a free-to-play game which took market share with its innovative combination of battle royale and builder-game mechanics. This showed that even the top franchises could be disrupted, at least temporarily.

“Last year [2019] saw a fight back from the rest of the industry, with several of the largest franchises returning to double-digit growth in the fourth quarter. Microsoft’s first-party content can be impacted by competition, but the Xbox platform stands to benefit no matter which publishers are successful.”

Further Reading

Navigating changing Asia

Coronavirus crisis adds urgency to sustainable investing agenda

‘Make or break’: Handful of firms could save blue-chip index’s dividend yield over 2020