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What are we looking for?

Companies in the gaming industry that are relatively undervalued, have high earnings quality and are exhibiting strong price-momentum characteristics relative to their industry peers.

The recent tragic shooting at a video-gaming tournament in Jacksonville, Fla., has again focused attention on U.S. gun laws and issues of mental health. Secondarily, observers have also noted just how popular multiplayer online gaming, or “e-sports,” has become; it is now a mainstream industry that is attracting growing investor interest.

Earlier in the year, Epic Games Inc. said it would provide US$100-million to fund prize pools for competitions in the game Fortnite, which makes it the biggest e-sport in the world in terms of potential winnings. According to industry analysts, the gaming industry is expected to generate US$138-billion by year end, roughly 13-per-cent year-over-year growth. Similar to their peers in traditional professional sports, gamers are winning millions of dollars in prize money. Gaming’s popularity is such that the International Olympic Committee will be asked by the Paris bid team to consider adding competitive e-sports – possibly as a demonstration sport – to the 2024 Summer Olympics.

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The screen

We used four proprietary Thomson Reuters models to assess selected major gaming stocks. Each model is scored out of 100; scores greater than 80 are considered optimum.

1. A combined-credit-risk (CCR) industry rank

The CCR model includes:

  • Structural credit: Structural leverage, asset volatility and asset drift 
  • Smart ratios: Profitability, liquidity, leverage, coverage growth 
  • Text mining: Reuters Top News, conference calls transcript, corporate filings and broker research.

2. A price-momentum model

  • The model includes price performance and volatility over short-, mid- and long-term ramges.

3. A relative-value (RV) model

  • The RV Model includes EV/sales, EV/EBITDA, price/earnings, price/CFO, price/book and dividend yield. If the company does not pay a dividend, the model also considers share buyback activity.

4. An earning-quality (EQ) model

  • The EQ model looks at accruals, cash flow, operating efficiency and how closely the reported earnings reflect operating earnings.

What we found

A leader in the industry since 1991, Electronic Arts Inc. ranked first among its peers based on the criteria selected above. EA Sports develops, markets, publishes and distributes games, content and services that can be played across multiple platforms such as consoles, PCs, phones and tablets. Compared with its peers, EA Sports has lower credit risk, is relatively cheap, has strong price momentum and has earnings that are backing its operating cash flows. The company is well-positioned to benefit from the significant expected growth of the e-sports industry.

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Alternatively, instead of picking securities, an investor can buy the ETFMG Video Game Tech ETF (Symbol GAMR-NYSE Arca), which tracks the performance of the common stock of companies across the globe that are actively engaged in business activity supporting or utilizing the video-gaming industry.

Investors are advised to conduct further research before investing in any of the stocks shown here.

Selected stocks related to e-sports

Company Symbol YTD Total Rtn. Mkt. Cap (US$) Credit Combined Industry Rank StarMine Price Momentum Region Rank Relative Valuation Industry Rank Earnings Quality Region Rank Div. Yield Recent Price (US$)
Electronic Arts Inc. EA-Q 22.8% 39,312,410,992.20 83 86 82 98 n/a 128.97
Facebook Inc. FB-Q -1.0% 504,238,303,574.28 78 54 84 93 n/a 174.65
Sony Corp. 6758-Tokyo 19.5% 69,106,405,646.74 57 77 35 90 0.5% 55.48
Activision Blizzard Inc. ATVI-Q 17.6% 56,486,852,210.83 75 76 60 85 0.5% 74.09
Nintendo Co. Ltd. 7974-Tokyo -7.1% 48,237,772,253.19 67 32 52 81 1.6% 349.31
Take-Two Interactive Software TTWO-Q 22.1% 15,254,119,360.17 82 61 53 56 n/a 134.01
Zynga Inc. ZNGA-Q -1.5% 3,389,115,275.48 85 52 83 15 n/a 3.94

Source: Thomson Reuters Eikon

Guillaume Girard works in the financial and risk unit of Thomson Reuters and specializes in active portfolio management, equity sales and trading.

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