News & Analysis

Are eSports companies a good investment?

25 Aug 2021 | by: Patricia Miller

Are eSports companies a good investment?

The eSports industry has seen explosive growth in recent years. It isn’t expected to slow down anytime soon. The global eSports market could be worth $1.9 billion in 2026, up from $691 million in 2019. That suggests a compound annual growth rate of 15.1% according to the latest figures.

The increasing popularity of video games is expected to drive the growth of the eSports industry. Growing acceptance for advanced gaming technology, evolving customer entertainment preferences, rising income levels, and increasing demand for mobile gaming are all tailwinds expected to help drive the industry’s growth through 2026.

With all these points in mind, investors are now asking themselves: should I invest in eSports companies?

Fundamentals of eSports stocks

The big players in this market are Activision Blizzard Inc., Alphabet Inc., and their Stadia platform, Electronic Arts Inc., Tencent Holdings Ltd., and Take-Two Interactive Software Inc.

Nvidia Corporation and Advanced Micro Devices Inc. also deserve a special mention. It wouldn’t be possible to play most modern video games without input from these two chip designers. They have designed and built some of the most advanced gaming chips to date.

The companies outlined are large gaming giants. They are diversified players on the gaming industry, with eSports being a secondary income stream. In terms of pure-play eSports industry stocks, there are limited options.

There’s UK-listed Guild Esports PLC, which made its debut on the London Stock Exchange last year. Meanwhile, Astralis Group is listed on the Nasdaq OMX Nordic. There are three different ways investors could play the eSports industry boom. All of these methods have various benefits and drawbacks.

The first is to invest directly in eSports companies like Guild Esports or Esports Entertainment Group. This direct bet on the sector may yield considerable returns. Nevertheless, there are many challenges for these firms to overcome.

Most existing pure-play eSports companies are small and lack the financial firepower of larger, more diversified players in the sector. This could hold back their growth in the long term. The second strategy is to buy the game designers and developers. Businesses like Electronic Arts and Take-Two offer a way to gain exposure to the eSports industry, but they also provide diversification.

These firms have an extensive back catalog of games, which provide a steady stream of royalties. They also sell into a bigger market overall. The global gaming market size is estimated at $175 billion, which’s 76 times the size of the projected eSports industry in 2026.

A larger market to sell in means higher revenues for the sector’s largest companies. That’s the crucial advantage Electronic Arts, and Take-Two have over smaller, more focused eSports businesses.

The third approach is to buy the chipmakers. Without the high-quality gaming chips from the likes of Nivida and AMD, the global gaming industry would be stuck.

What is the bull case for eSports companies?

Increased social acceptance is a factor. Ten years ago, it would have seemed unlikely that eSports could become a competitive occupation with players gaming in stadiums watched by thousands of spectators.

However, that is just what has happened. Impressive international prize pools, growing streaming revenues, and sponsorships have helped power the growing popularity of gaming tournaments.

Rising investment and sponsorship spending, as well as broadcast rights, live event ticket sales, merchandise sales, and in-game transactions, are all expected to contribute to the Esports industry growth over the next five years.

Guild Esports’ growth is reflective of the industry’s expansion over the past few years. Incorporated in September 2019, the company went through several financing rounds, raising just under $7 million. At its IPO, the group raised a further $26 million. At the time of writing, it has a market capitalisation of $44 million.

The company’s growth was given a leg-up after its secured investment from soccer Legend David Beckham. Before his investment, the company signed an agreement with the firm that manages his image rights. It agreed to pay $20 million over five years for Beckham to become “the face of Guild Esports.”

What is the bear case for eSports companies?

Undeniably, eSports looks to have a bright future. But no investment is completely risk free and there is a growing concern that interest in real sports will once again reign supreme once the world has recovered from the effects of the pandemic.

Another concern from investors is that as eSports companies heavily rely on sponsorships and live event ticket sales, failure to gain these could cause share values to plummet and put the brakes on the growth expected to be seen over the next five years.

Whilst it is unlikely that the popularity of video gaming will drop anytime soon, it is a factor to consider. It can be assumed that investing in eSports companies is a long term investment plan rather than a short one.

Should I invest in eSports companies?

Overall, eSports is expected to see significant growth over the next few years, and there are many different ways to invest in this market. One could invest directly in eSports companies or buy exposure through another company that has some association with the industry.

A combination of the two may provide the best of both worlds– exposure to eSports and another fast-growing market.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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