The meteoric rise of esports continues. As strange as it may seem, particularly to those of us of a certain age, competitive video game playing is a big deal. Investors should be positioning themselves accordingly for its continued popularity. My advice in back in January was to buy Activision Blizzard (ATVI) with the intention of hanging on to it for the long haul. To this point, that has been an okay call. Not one of my best as the gain had, until yesterday, lagged that of the broader market, but not disastrous. Yesterday, ATVI jumped over seven percent which helped make the original call look better, but the reason for it also bodes well for the future and means that if you didn’t buy it then you should consider buying it now.
What changed yesterday was that Activision addressed one of the main factors that had been holding back the stock, specifically the immense popularity of the game Fortnite. Fortnite’s “battle royale” formula has taken the world of teenage gaming by storm, and as a parent of two teenagers I can personally attest to that. Neither of my two were particularly into video games until Fortnite came along, but both enthusiastically embraced the craze. Activision’s response, a battle royale mode for its popular Call of Duty franchise that launched in beta mode yesterday in preparation for its inclusion ion the new version of the game in a month, was well received, causing the stock to jump so spectacularly.
Investors who tried to cash in on the Fortnite craze probably got burned. As was frequently pointed out in articles such as this when Fortnite fever was gripping the nation this Spring, the obvious play was to buy stock in the publicly traded company with an ownership stake in the game’s publisher, Epic Games. That would be the Chinese internet giant Tencent Holdings (TCEHY).
The problem with that, however, is one frequently faced by investors attempting to cash in on a trend…specificity. As explosive as the growth in Fortnite has been, the revenue and profit derived by Tencent from their forty percent holding in Epic is just a drop in a bucket for the company overall, and their core Chinese internet businesses have been under a lot of pressure. That is why, even during the time when Fortnite has been all the rage, the one-year chart for TCEHY looks like this…
So, while the popularity of Fortnite has delayed progress in ATVI, now that they have answered that stock still looks like a good way to play continued growth in esports and video games. One can of course make a case that TCEHY, who own a stake in ATVI, and seemingly every company in gaming as well as in Epic, looks cheap and can be expected to bounce from here. I would not argue with that and would have no issue with anyone who decided to buy both, but the company’s other areas of business still dilute it as pure play on video gaming.
Usually, buying into trends is risky, as they are, by definition, short-lived. ATVI, however, is no flash in the pan. It is a solid company, with earnings and revenue growth coming off a base of multi-billion-dollar sales and a solid balance sheet as evidenced by a current ratio of levered free cash flow of over $2 Billion.
Whether you buy ATVI alone or both it and TCEHY though, it is important to remember one thing. These are long-term plays on societal trends, not short-term trades. Neither stop-losses nor target levels should therefore be set in advance and it may be necessary to ride out some volatility. With that proviso though, having some exposure to the future is important for investors, even those of us somewhat long in the tooth, and ATVI provides that.