Canadian rap artist Drake, basketball legend Michael Jordan and Hollywood actor Ashton Kutcher are rich and famous celebrities, but they have something else in common: They have all invested in private e-sports teams or companies.
E-sports, or “electronic sports,” is an emerging industry focused on professional video-gamers competing in front of a live audience or online. Given the recent stock market pullback and strong growth of this business, investors may want to consider various ways to bet on it – from video-game publishers to startups.
“It’s still early days – a bit like the Wild West” in e-sports, says Nick Mersch, associate portfolio manager at Toronto-based Purpose Investments Inc. Some people compare it to professional sports, but he thinks it’s “more like World Wrestling Entertainment, [in that] it’s more entertainment and product strategy.”
Global e-sports revenue is expected to rise to US$1.1-billion this year, mostly from media rights and sponsorships, according to a report from Newzoo, an e-sports research and analytics firm. China is the largest market by revenue followed by North America.
“The explosion and mass adoption of video games over the past two years has been exponential,” says Mr. Mersch, who is also co-manager of Purpose Global Innovators Fund (PINV-T), and allocates about 20 to 25 per cent of the fund’s assets under management to the e-sports theme.
Fortnite Battle Royale, an online video game developed by Epic Games Inc., has some 250 million registered users, compared with about 167 million subscribers for Netflix Inc., he says. And the buildout of speedy 5G wireless digital cellular networks will let consumers play games more easily on smartphones, tablets and laptops instead of buying expensive consoles.
Video-game publishers, which benefit from the launch of e-sports leagues and events based on their popular titles, are “the most direct … and probably safest way” to play e-sports development, Mr. Mersch says. “Our favourite is Activision Blizzard Inc. (ATVI-Q). … We also hold Tencent Holdings Ltd. (TCEHY-OTC.US), which owns Riot Games, known for its League of Legends title.”
Activision Blizzard recently also signed a US$160-million media-rights deal, in which Alphabet Inc.’s YouTube is now the preferred streaming partner for its Overwatch and Call of Duty e-sports leagues, Mr. Mersch says. That’s on top of Activision Blizzard earning multimillion-dollar franchise fees from e-sports teams.
However, the risk for e-sport teams is that media rights and sponsorship revenue don’t accelerate faster than the franchise fees, he says. “Can they recoup that amount before the individual title fades from popularity?”
Investors can also play the e-sports market through “the pipes” or live-streaming websites. In North America, popular ones are owned by tech giants. In addition to YouTube, there’s Amazon.com Inc.’s Twitch and Microsoft Inc.’s Mixer.
However, U.S.-listed, China-based Huya Inc. (HUYA-N), that country’s equivalent of Twitch, offers direct exposure to live-streaming, Mr. Mersch says. The recent coronavirus outbreak in China has also become a tailwind for Huya and others industry players, as more people opt for home-streaming entertainment rather than attending live events, he adds.
E-sports startups are also popping up on Canada’s junior exchanges. Vancouver-based e-sports-betting technology provider Askott Entertainment Inc. “is a private company in our fund that is planning to go public,” Mr. Mersch says.
He also likes Vancouver-based Enthusiast Gaming Holdings Inc. (EGLX-T), which recently graduated to the Toronto Stock Exchange. It has a network of more than 100 gaming-content websites, while its Luminosity division owns e-sports teams.
Enthusiast Gaming, which hired a sales team last fall, aims to make money from its websites by dealing directly with advertisers. That’s a higher-margin approach than relying on programmatic digital ad buying, Mr. Mersch says.
Robert McWhirter, president of Toronto-based Select Asset Management Inc., agrees the growth opportunities in e-sports appear attractive, but cautions that investing in startups is “very speculative, in part because it’s early days [for this business].”
Mr. McWhirter, who bought shares of Enthusiast Gaming through a private placement, profited from selling its stock after the minimum four-month holding period. While he owns warrants to buy shares at $1.60 each, he wants to see progress from its new marketing strategy.
“They have been very successful in acquiring websites, but not so much in monetizing them,” he says.
Still, a recent move by Francesco Aquilini – Enthusiast Gaming’s chairman and owner of the Vancouver Canucks – to buy 250,000 shares of the e-sport company at $1.98 each on the open market is comforting.
Mr. McWhirter also acquired shares of Fandom Sports Media Corp. (FDM-CN) through a private placement offering, but lost money. The sport-entertainment and gaming company recently did a share consolidation based on one share for 10. “It’s been a Grade A disappointment,” he says.
Exchange-traded funds (ETFs) can also offer exposure to the video-gaming and e-sports industry. In Canada, there’s Evolve E-Gaming ETF (HERO-T). U.S.-listed ETFs include ETFMG Video Game Tech ETF (GAMR-A), VanEck Vectors Video Gaming and eSports ETF (ESPO-Q), Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD-A) and Global X Video Games & Esports ETF (HERO-Q).
“The gaming theme is intriguing,” but investors need to lift the hood to see if they are comfortable with the country and company-size exposure, as well as what the ETF charges, says Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial Inc.
The Roundhill ETF’s 0.25-per-cent fee is attractive, says Mr. Straus, who’s also an avid gamer. “It’s the cheapest now, but there is a caveat. Its real management expense ratio is 0.50 per cent, which could be charged later this year.”
However, this ETF is “more of a pure play on e-sports,” he adds. “It also holds Chinese streaming companies [such as Huya and DouYu International Holdings Ltd. (DOYU-Q)], which are really tilted [toward] exposure to the e-sports industry.”
ETFMG Video Game Tech ETF, which launched in 2016 and charges a 0.75-per-cent fee, is the oldest of the bunch. Its 16.5-per-cent annualized total return from inception to Feb. 28 handily beat the MSCI All Country Index’s 9.6-per-cent gain in U.S. dollar terms, he says. “But it has also been quite a bit more volatile.”
There can be a strong case to invest in the e-sports industry for those people seeking diversification from broad-based, passive index funds and are also familiar with the industry, Mr. Straus adds. “That’s not to say that this is a sure bet. There’s still risk; it’s an untested industry.”