Stock Safari Episode 1: E-Sports and Gaming
The digital shots heard round the world...
Check us out live on Youtube to hear more about the stocks mentioned in this article. 9pm est April 15th
Do you remember where you were when cadiaN won a 1v3 in Counterstrike to win the entire ESL Pro League Season 13?
Or what about when Dafran dropped a graviton surge from the heavens onto Paris Eternal?
Most of you likely can’t answer, but e-sports fans will never forget.
Welcome to the 21st century…
To fans, e-sports is the world series, it’s the Superbowl, its champions league.
e-sports are quickly capturing the minds and wallets of the next generation of global consumers.
The current stats on gamers may surprise you…
More than 214 million Americans play video games
64% of U.S. adults and 70% percent of those under 18 regularly play video games
The average age of a video game player is 35-44 years old
Gaming contributed 90 billion to the US economy in 2019
Let’s face it, the pimple-faced teen gamer stereotype is dead. The average gamer is an adult with real purchasing power, not to mention a parent of a future gamer or two.
Gaming and E-Sports are Where the Growth Is
On a global basis, there are currently 2.7 billion gamers, growing to 3 billion and they will collectively spend more than $160 billion in 2020 growing 7% a year to hit $200 billion by 2023.
E-sports is growing even faster, by 15% a year to hit $1.6 billion by 2023.
At the end of the day, to make money on e-sports at this early stage you need to understand how the money flows and to whom.
Here comes the breakdown 3..2..1...
Who Makes Money on E-Sports?
Studio A makes a game called “Fist of Legend”…
Consumers buy Fist of Legend sending money to Studio A.
Studio A uses the money to create an E-Sports league for Fist of Legend and for a prize pool to incentivize competition.
Any team that wants to compete in the league has to pay an upfront license fee to Studio A, more money flows to studio A.
The Fist of Legend Tournament causes a spike in interest, purchases of the game and in-game spending explode. Even more money flows back to Studio A.
Studio A shares a cut of in-game revenue with the Fist of Legend league teams, almost all of this money goes to player salaries.
Having superstars on your team is good for business….
At this point, you’ve probably noticed no money is going to the team itself.
Let’s use football as an example for the current state of e-sports.
The NFL makes most of its money from broadcast rights, not from selling tickets jerseys or hotdogs.
e-sports today is just like the NFL, minus the billions of dollars paid every year for broadcasting rights.
e-sports is still in the early days of monetizing the audience with most of the money going to the game creator and the players, with little leftover for the team.
For now, the safest way to make money off of the growth in e-sports is by owning the guy who makes the game and the guy making the equipment to play and stream the game (aka the publisher and the peripheral maker).
Time for the Stock Picks
Armed with the knowledge of where the money flows in gaming, it’s time to introduce you to two companies well-positioned to benefit from this trend.
Using our proprietary screening methodology, the special sauce if you will, we’re digging into two interesting stocks our screen has identified as worth a look.
These two companies have a combination of the right price, the right outlook, the right fundamentals and stock performance that doesn’t match up with the underlying results.
Corsair Gaming (NASDAQ:CRSR)
Why Our Screen Picked Corsair: In the last 3 months analysts have raised 2021 revenue estimates for Corsair by 12%, yet the stock is down 5%. Improving fundamentals and a cheaper stock are a recipe for a rebound.
The Pitch: Corsair is one of the best ways to invest in the growth of e-sports outside of owning the game publishers. Corsair’s gaming peripheral segment is the fastest-growing part of the company while also being the most profitable. With a discounted multiple (down 21% since February) you are buying in before the company has a chance to handily beat revenue estimates of only 7%-9% over the next 2 years.
Recent Catalysts: COVID-19 has accelerated interest in e-sports, gaming and streaming, all segments where Corsair excels. The e-sports market is growing at 15%, making it easy for Corsair to beat market expectations of only 8% growth over the next 2 years.
Business: Corsair has two segments
Gamer Peripherals: Keyboards, mice, controllers, streaming gear.
Gaming Components: Components for building a gaming pc
The growth in e-sports and gaming is leading to:
More hardcore pc gamers (they spend more on gaming equipment)
More aspiring E-Sports pros (they spend more on gaming and streaming equipment)
More aspiring streamers (they spend more on gaming and streaming equipment)
All positive trends for Corsair. Corsair recently bought a coaching company giving them even more leverage as casual gamers turn to aspirational gamers turn to pro gamers.
With the stock down 33% since the peak in November and at a reasonable 22x price/earnings, continued growth in e-sports will make it easy for Corsair to beat revenue and cashflow estimates over the next two years.
Sea Limited (NYSE:SE)
Why Our Screen Picked Sea: Analysts are raising revenue estimates for 2021, even as we exit the pandemic. Sea is the third fastest-growing gaming company in the sector and growth is only forecast to slow from 101% in 2020 to 94% in 2021.
The Pitch: Sea is a juggernaut in mobile gaming in Southeast Asia not to mention the largest player in E-Commerce and Fintech Services. Sea is the best way to invest in the digital revolution that has finally arrived in Southeast Asia.
History: Founded in 2009 in Singapore, Sea operates throughout Southeast Asia and has recently been expanding across the globe.
Business: Sea is the leader in the gaming and e-commerce sectors of Southeast Asia. The company generates most of its revenue through mobile gaming (Garena) and E-Commerce (Shopee). With 750 million users, Sea is 4 times bigger than its next largest competitor and has significant scale.
Recent Catalysts: Covid-19 has kicked off an accelerated shift to digital services in the region. The digital consumer base in the region added 40 million internet users in 2020, compared to only 10 million in 2019. Forecasts are calling for e-commerce spending to grow 3x by 2025 compared to 2019.
Mobile Gaming: Sea is in the mobile gaming sweet spot. It owns Garena, the maker of Free Fire, one of the top-grossing games in the world. Forecasts are calling for revenue from Garena to potentially 5x by 2025 compared to 2019. Free Fire launched in late 2017 and since then has dominated the market making up 67% of mobile gaming sales in South Asia.
Even though the company is heavily reliant on revenues from Free Fire, it can easily continue monetizing this game for years while working with in-house studios to create the next global hit. Grand Theft Auto Online for example just had its second-best revenue year ever, with the best year coming in….2013. The longevity of online games is for real.
In the first quarter of 2021 Free Fire has caught on in North America which is a positive surprise for Sea’s gaming revenue abroad.
Overall, Sea’s gaming division will likely grow at a 15% growth rate for the next 5 years at least.
E-Commerce: Shopee, Sea’s e-commerce subsidiary is ranked #1 for visits across Southeast Asia with double to triple the traffic of the second-place competitor in every country but one. E-commerce represents 47% of sales, up from 38% in 2019 and is a major driver of company revenue.
The business is not yet profitable, but with sales forecast to rise 6x from 2019 to 2023, Shopee will start generating profits by 2023.
Fintech: The most exciting segment for Sea is probably its DFS (Digital Financial Services) segment, also called Sea Money. With millions of users, Sea’s mobile wallet and financial services segments have a ton of opportunity to replace the use of cash across the region.
With revenue estimated to grow to $1.2 billion by 2025, from only $58 million in 2020, the growth runway is straight fire. The market cap of the fintech business alone is on track to grow to $20 billion in 4 years from only $2 billion today. A huge benefit to turning into a bank and lending money is Sea’s ability to collect cheap deposits which it can lend out to other divisions to accelerate growth. Think of the Fintech arm as a cheap way to raise money for the gaming and e-commerce arms.