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Over the last quarter, our video games holdings have moved sideways on a theme level. However, on a single stock level there has been some dispersion. Both Tencent and Ubisoft have finished the quarter up by 5.7% and 5.0% respectively. while Electronic Arts was more negatively impacted by the US tech correction in September and declined 1.3%. We added to our positions in Ubisoft on 15 September and 30 October after the reassuring games reveal event, the decisive steps taken towards resolving the misconduct issue and very strong fiscal H1 results despite game delays. We also sold half of our positions in Electronic Arts with a profit of 40% since inception. This came as part of our tactical decision to trim our overall exposure to US technology names.
Initially dragged down by misconduct allegations in July, Ubisoft has reaccelerated in September on the back of two catalysts. First, the company held its second Ubisoft Forward event featuring lots of announcements, updates and celebrity partnerships on 10 September. Second, Amazon announced its own cloud gaming service, called Luna, in partnership with Ubisoft on 24 September. Markets took the news positively and pushed Ubisoft’s share price further up as Amazon chose Ubisoft as its launch partner over its US peers.
However, the share price fell again after the most recent earnings update. Management announced a delay of two AAA games from Jan’21-Mar’21 into Apr’21-Sep’21, citing operational difficulties due to Covid-19 and work from home. Notably, Ubisoft’s operating income for fiscal H1 (Apr’20-Sep-20) of €114m far exceeded €42.5m consensus expectations. Despite the delays, operating income guidance for this fiscal year stayed within the original range (from €400-600mn to €420-520m, including €30m FX headwinds). That implies a very strong underlying performance of the games as almost the same profits should be delivered with 3 instead of 4/5 games originally planned.
Video gaming activity has shot up across the globe as lockdowns were introduced. After they were gradually lifted, the activity has started to moderate, as measured by the total players on Steam (a major PC platform). The same trends have been observed in concurrent viewers on Twitch (the most popular video games streaming platform). Both metrics have shown strong correlation with the Oxford Stringency Index, which tracks government measures in response to the Covid-19 pandemic. Thus, growth in total players and concurrent viewers have moderated during the summer as economies started to reopen. However, in August, the correlation between the global average stringency index and the number of players and viewers decoupled, as the latter have started to grow again, while the former continued its downward trend. Q4 is usually the busiest period of the year with new iterations of existing franchises and new titles coming to the market before Christmas. This year the season is going to be particularly busy with new games coming from all major publishers, including titles such as “Call of Duty: Black Ops Cold War”, “Assassin’s Creed Valhalla”, “Spider-Man: Miles Morales”, and probably the most anticipated game – “Cyberpunk 2077”.
Mobile gaming is the largest and fastest growing part of the video games market. Tencent, a dominant player, generated $20.3bn of revenues in 2019 from gaming alone. Ignoring the next four largest companies by revenue from games, which primarily operate in the console market (Sony and Microsoft) or generate games revenue by collecting fees on their mobile app platforms (Apple and Google), the next closest peer to Tencent is NetEase with $6.7bn in gaming revenue. The difference has become even bigger this year, as Tencent outpaced NetEase with a growth of +33.0%/+38.3% vs. +14.1%/+20.9% in Q1/Q2, respectively.
The key reason for Tencent’s dominance is its vast portfolio of games through internal development, partnerships and investments. Some of the well-known video games developers and publishers Tencent either fully owns or has a stake in include:
- Riot Games (100% ownership, known for League of Legends),
- Supercell (84%, Clash of Clans),
- Epic Games (40%, Fortnite),
- Glu Mobile (15%, Kim Kardashian: Hollywood),
- Bluehole (11.5%, PUBG),
- And even the largest AAA publishers such as Ubisoft (5%, Assassin’s Creed) and Activision Blizzard (5%, Call of Duty).
Such a variety of popular games under its umbrella puts Tencent at the top of the mobile video games market. In fact, Tencent games have steadily taken half of the top 10 spots on the iOS platform both in China and globally in Q2, according to monthly active users (MAU) data from Newzoo. Unfortunately, Android data is not available in China, limiting our comparison to iOS data only.
Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.
If not otherwise indicated, all graphs are sourced from Dolfin research, October 2020.
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