eSports (Getty images)
For investors, spotting a fundamental change in any industry and getting in on the ground floor is the Holy Grail. In many cases the big money is made pre-IPO, but when the disruption is real and lasting there are very good profits to be had by spotting a trend early, investing and then waiting.
Buying either Google (GOOGL) or Amazon (AMZN) at or around their IPO prices of $85 and $18 respectively would have been the kind of investment that most people dream of, but to do so you had to look to the future, and the older we are, the harder it becomes to do that. So, to find the next big thing, maybe we should be looking at what is changing in our kids’ world rather than our own.
Right now, one of the biggest changes there is the rise of competitive online gaming, or eSports.
Because I am old and so are my friends, most people I talk to are shocked to hear that there is such a thing as college eSports teams, but they exist. Last year, even the usually conservative, somewhat moribund NCAA was forced to sit up and take notice, as an increasing number of colleges offered scholarships to video game players, with even a top five conference school, Utah, recruiting an eSports team.
As with other, more conventional sports though, the real money, and the opportunity for investors, is in the professional game. (For those readers of a certain age, yes, there is such a thing!)
To the uninitiated, the size of the market is stunning. In 2016 there were, according to Statista, 162 million frequent watchers of eSports, with another 131 million who watched occasionally. Those numbers are, as you can see on the chart below, expected to rise to 286 million and 303 million by 2020.
That is nowhere near the 3.2 billion who watched the last soccer World Cup, but it blows away the Super Bowl's 111.3 million viewership last year. Most of those viewers are in their teens or early twenties, so are a much-coveted demographic from an advertising standpoint.
To put it another way, eSports is, or has the potential to be, really big money.
That has already been recognized by some big names in sports and entertainment. NRG Esports, for example, has rosters for most of the major games, with a list of investors that reads like a who’s who in sports and entertainment over the last decade or so. Jennifer Lopez, Michael Strahan, Alex Rodriguez, Marshawn Lynch and others are all part of the ownership team of NRG.
So, as always in these columns, the question is, how should investors play it? Ownership of teams like NRG is out of reach for most of us, but you should certainly be following news and looking for when they go public. In the meantime, however, the makers of the games are probably the best bet for retail investors.
As you might imagine, in these early days, the popularity of games is in a constant state of flux, but one fairly consistent winner seems to be Activision Blizzard (ATVI). Their latest offering, Overwatch, has not even been out for two years, but is already achieving massive popularity.
As you can see, ATVI is no longer cheap by conventional metrics, but given the enormous potential of eSports, a forward P/E of around 27 still looks like a bargain. Moreover, if you understand the full potential of this market, old-fashioned things like P/E are not the point.
There are, of course, other implications of the rise of internet gaming as a spectator sport. For one thing it is yet another problem for some struggling mainstream media companies. It is also another plus for all types of mobile devices and streaming content providers. To truly invest in the rise of eSports, however, you need a purer play than those, and something like ATVI fits the bill.
The company may not necessarily emerge as the big winner as things change, but it is a great starting point for those who intend to follow developments in this rapidly growing area.