I. Sector Landscape and Outlook

Novel coronavirus has put most of the businesses across the globe out of order; however, the video gaming industry has shown signs of resilience as both pre-existing, and new games continue to edge higher. The explosion of the novel virus, which has emerged from the mainland of China seems to become a boon for the global video game industry. Social distancing measures and lockdown announced across the world to curb the spread of the deadly virus have boosted user engagement with video games and sports at home. Many of the UK-based gaming stocks have reported a healthy quarterly number with sales surging exponentially during the pandemic.

The sales across the global gaming markets have witnessed higher double-digit growth rate. Moreover, new entrants in the existing portfolio of video games have also received traction from the gaming community. And the gaming sector is thriving despite the widespread economic turmoil.

Furthermore, video games offer an engaging distraction for people who are staying at home and practising social distancing measure. The latest reports from various research houses show that the players' playing time and sales since lockdown rolled out has significantly increased and the pace is expected to remain intact for an extended period. The consequence of the deadly virus on video gaming sector has been a massive enlargement of the audience available to publishers. Gaming is typically an at-home activity, and the stay at home situation has come as a big blessing in disguise for this industry.

UK Video Game Sector

The British video game sector is the largest across Europe. The UK gaming sector economically, and culturally forms a significant part of the global video games market. The TIGA Business Opinion Survey 2019 reported that the UK game development contributed over £ 1.8 billion towards the British economy in the year to November 2018, as well as an estimated £747 million in direct tax and indirect tax revenue to the Exchequer. According to latest estimated by The TIGA Business Opinion Survey 2019, around 37,536 workforces of the UK were engaged directly or indirectly in the video games industry, comprising 13,277 people in games development.

The video game developers based-out in the UK are bullish over the potential market opportunity and the prospects of the industry. Industry players are also expected to benefit from the shift in value chain within the gaming world led by innovations.

Quite a few noteworthy trends are taking shape within the gaming market, such as the move to streaming, the rapid growth of e-sports and the continuing development of Games as a Service (GAAS). According to data processed by gaming analytics firm, Newzoo, the global video game market is expected to be valued over US$ 180 billion by 2021, led by the advancement of technology infrastructure – both for developers and users alike.

The Global Market Overview

In the year 2019, the global gaming market was valued at US$ 152.1bn and recorded an increase of 9.6% on a Y-o-Y basis. According to the gaming analytics firm Newzoo, the global gaming industry is estimated to grow at a CAGR of 9.0% to US$ 196.0 billion. (From 2018 through 2022). 

 


Asia-pacific region accounted for 47% of the total global game revenue, followed by North America (26%), Europe, Middle East, and Africa (22.8%) and Latin America (3.6%). However, the licensing freeze has significantly impacted China, and on that account, Asia Pacific is no longer the fastest-growing region. Latin America is the fastest-growing region, driven by infrastructure development and increased appetite for games and esports. 

Segment Overview

The global video game industry is divided into four broader segments:

1. Mobile Gaming Segment: In 2019, this segment accounted for 45% of the total global gaming revenue. Out of which, 36% comes from the smart-phone segment, and 9% comes from tablet segment. During 2019, smart-phone games registered a revenue growth of 11.6% to US$ 54.9bn, and tablet segment revenue grew by 5% to US$ 13.6 bn, on a YoY basis.
 
2. Console Games: This segment is the second-largest revenue generator within the global video game industry and accounted for approximately 32% of the worldwide video gaming revenue. In the year 2019, console games registered a revenue growth of 13.4% on a YoY basis to US$ 47.9bn.
 
3. Downloaded/Boxed PC Games: The third-largest segment within the industry and accounted for 21% of the total global video games revenue. In 2019, the PC Games registered a revenue growth of 6.6% to US$ 32.2 bn against the corresponding similar period.
 
4. Browser PC Games: This segment stood for just 2% of the global gaming revenue. Further, the revenue in this segment has contracted by 15% on a YoY basis to US$ 3.5bn. 

 
Fig 3: Global Market Share Per Segment (2019)


Source: Newzoo
 
Outlook

Shift Towards Recurring Revenue Model: Earlier, a vast majority of gaming revenue was solely driven by consumer spending on new games, but over the last few years, the business model of gaming companies has evolved significantly. Nowadays, consumer purchases fewer games but spending more hours with those games, which has moved the business model from a single unit to recurring revenue generation from a basket of active users.

Moving Value Chain Within the Video Gaming Industry: Recently, Microsoft CEO Satya Nadella briefed journalists at an invitational editors’ meeting at Microsoft’s headquarters on what they describe as “Netflix for games”. He discussed Microsoft’s move to video game streaming with Project xCloud, where a gamer can play high quality, blockbuster games on any device with the game being powered by a remote computer. Last year in March, Google announced Stadia, its cloud-based system able to run on PC, tablet, TV and mobile. During the same time, Apple announced Apple Arcade, and announced that the company is developing 2 games for subscription service. These are significant steps for the streaming of video games.

These trends will strengthen the demand for high-quality video games within the gaming community, which would further enhance gaming firms business model and growth strategy for global gaming companies. Also, the opportunities for gaming companies has been further reinforced by the ongoing shift towards Game as a service, in which developers/publishers engage with players over an extended period following the release of a game providing downloadable content and other existing services. The UK operators within the gaming community are well-positioned to benefit from the changes in the market dynamics.
 
 
II. Investment Theme and Stocks under Discussion (TM17, SUMO, FDEV and CDM)

Having understood the industry dynamics, let’s now look at four stocks that are trending in the current situation.To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).

Fig 4: Relative performance of the stocks under discussion against FTSE 100 (1 Year)

Source: Refinitiv, (Thomson Reuters)