I played a lot of games from my elementary school years to the beginning of college. Now, I’m not going to pretend that I was a socially awkward kid who grew up with few friends and whose sole escape was gaming or the internet. Fortunately, I had a lot of social interaction with friends from schools and other extracurricular activities. However, whenever I have some “alone time” at home (I’m the only child), I always resort to the internet and specifically gaming as my main source of entertainment.
Believe it or not, my dad actually purchased Playstation 1 and 2 on his own whims, without any request from me. I was literally too young back then to comprehend the latest gaming device developments let alone asking for them. One of the coolest memory that I vividly remember was seeing my dad played Grand Theft Auto 3 as I was walking downstairs from a nap.
Throughout the years, I contributed a non-trivial part of my personal growth and knowledge to gaming. Growing up in a non-English speaking country, one of my main English language interaction was having conversations with people from all over the world through online gaming, specifically MMORPG (massively-multiplayer online role-playing game). It also taught me competitiveness, appreciation for art/story-telling, and strategic thinking.
During my four years in college, I observed the gaming industry from the sideline as I just did not have the time to fully immerse myself compared to when I was back in high school. I got too competitive once I decide to commit to something, and I just did not have the time to do so for gaming in college, but I digress.
In this write-up, I hope to elaborate on why I’m bullish on the gaming industry from an investing perspective, and why do I think it holds relevance to the younger generations’ culture moving forward.
In this article, I’ll refer to the “gaming” industry a lot.
In reality, the term here is not fully accurate. What I describe as “gaming” is a combination of gaming technology, eSports, live streaming, and others; perhaps a better terminology is the “interactive entertainment industry” as DrDisrespect often said.
For the sake of this write-up, I’ll simply refer to it as the gaming industry.
More Tech Than You Realize
A lot of what goes into the creation of a game, outside of the creative aspects, is the high-quality simulation. When our character shoots a bow and our enemy dies, that’s a simulation. Basically, anything that goes on in the virtual world of gaming is a smartly engineered simulation. One of the biggest players in the industry, Unity Technologies, has actually worked with non-gaming related industries in the past and its software has been used by:
- The Hong Kong International Airport to simulate passenger flow
- Moviemaker to shoot the recent Lion King Movie
- The US Army to create immersive 3D maintenance training application
- Volkswagen for employee training
Meanwhile, another big player, Unreal Engine (under Epic Games), is responsible for popular games such as Fortnite and the recent breakthrough in online interactive entertainment that was popularized by the quarantine when the likes of Travis Scott conducted his concert via Fortnite. Unreal has also created specific software for film making and worked with famous studios such as The Third Floor who is responsible for Marvel, Star Wars, and Game of Thrones.
As the quality of the graphics processing unit (GPU) increases, gaming technologies use-cases will be able to transfer over into and overlap with other industries because of its interdisciplinary nature. We often forget that what’s considered as gaming technology is no longer than just our old Gameboy Advance, it now encapsulates:
Gesture Control -> Nintendo Wii
Facial Recognition -> Far Cry 6
Virtual Reality -> Half-Life: Alyx
Augmented Reality -> Pokemon Go
Cloud Computing -> Google Stadia
On-Demand Gaming -> Twitch, FB Gaming, Youtube Gaming
Social Media -> 100 Thieves, TSM
and many more…
Let’s talk number.
One of the factors that made the gaming industry so enticing is because it’s still greatly undervalued. Despite the great business, technology, and cultural relevance, the majority of the older generations (GenX and Baby Boomers) who hold the majority of capital in this world, aren’t fully aware of the industry’s potential.
The chart below compared the performance of S&P500 (SPX) with the top 5 gaming ETFs. Collectively, these gaming ETFs have ~$950MM AUM as of September 11th, 2020.
When we compare the two largest gaming ETFs (ESPO & HERO) performances to other technology ETFs in the tech industry including but not limited to FinTech, Cybersecurity, Robotics, AI, Cloud Computing, SaaS; we can see that gaming ETFs have outperformed the other tech ETFs year-to-date. The caveat here being that COVID-19 helped the industry significantly and most gaming ETFs are relatively younger in age, meaning that we still need to see whether they can withstand the test of time.
We can also see from the treemap chart below that the Asset Under Management (AUM) under the two largest gaming ETFs are still pale in comparison to the other tech ETFs. This is also without considering a lot of private gaming companies whose stocks are not available to be included in the ETFs yet because they’re not publicly traded (Epic and Unity to name a few).
Moving forward, as investors seek more growth assets in this world of non-existent risk-free rates and as more gaming companies go public, we can only imagine the scale and positive growth that these gaming ETFs will experience.
Deep Internet and Cultural Relevancy
Perhaps the most under-discussed factor that makes the gaming industry so incredibly poised to take over in the near future is its cultural relevance with “deep” internet users. The term deep here refers to individuals who spend a lot of time on the internet, understanding the latest development, trend, and culture. Similar to the term business acumen, there exists a skill-set called internet culture acumen. The majority of people who own this skill-set are Millenials and GenZ, with a few exceptions of savvy GenX such as GaryVee. This is because the younger generations spend more time online, especially gaming, or more broadly speaking spending time in the “interactive entertainment industry”.
The importance of internet culture acumen can also be seen from how talk show hosts and celebrities are embracing online platforms more and more because the latest trends and cultural relevancy have started to emerge from the internet first. It took them years before they acknowledged Youtube, but it took them a lot faster to acknowledge the relevance of Twitch and TikTok.
We can also see that lifestyle and media brands that are tied with gaming are growing more relevant than ever, with companies such as Team Solomid and 100 Thieves, which were originated from eSports/gaming culture, raising hundreds of millions of dollars from investors to scale their businesses. On top of that, these types of companies also have a great impact on the overall influencer culture as they have started to sign and incorporate gaming culture with what were originally known as non-gamer influencers. This can be seen by how Team Solomid recently signed Hikaru Nakamura, a chess prodigy, 5 times US chess champion, and the youngest American to earn the title of Grandmaster; and 100 Thieves signing Neekolul, the Tik Tok influencer that got famous from popularizing the slang “Ok Boomer”. By having different influencers under the same brand, it almost creates something that’s similar to a network effect, increasing the brand’s outreach exponentially and making them a powerhouse in the influencer industry.
Additionally, the gaming industry also owns a lot of Intellectual Property (IP), which is one of the greatest types of assets that every successful business must own. In technology or finance, it might not be as apparent because the IPs are trade strategy secrets or social media algorithms. In the gaming industry, the importance of IP is enhanced because of its tie with art, creativity, and world-building. Similar to comic books such as Marvel, great games have IPs that transcend times and cultures. No matter what language you speak, you know Super Mario as the guy who tries to save the princess by jumping from stages to stages. Big players in the entertainment industry have also started to acknowledge this. There are more and more cinematic adaptions of games such as the recent Pokemon movies and Netflix’s Witcher (originated from the books, made popular by the games).
The gaming industry is only going to get bigger with stronger technological and cultural relevance. Gamers will no longer be associated with the old negative stigma of an overweight individual with no social life that spends 12 hours a day playing games in his parents’ basement; and game technologies use-cases will no longer be confined to only game design, its importance will increasingly overlap with other emerging tech.
That’s all I have for this week,