The Lockdown May Be Ending, But This Profitable Trend Isn’t

One year ago, I urged the subscribers of Fry’s Investment Report to take a position in the VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO).

My reasoning was simple: The Covid-19 pandemic would get worse before it got better, which meant that “gamers” would be spending even more time than usual playing video games.

That thesis played out almost exactly as I anticipated — except that the pandemic lasted much longer than I imagined — and the video-gaming stocks soared.

Although I recently advised taking profits on ESPO, I don’t believe the long-term investment potential for the video gaming sector is over.

Video-gaming stocks might take a breather for a while, but they could still deliver exceptional gains over time.

In fact, some of the best opportunities may be companies that are not yet publicly traded. Epic Games Inc. is one example. The company’s premier title is “Fortnite” — a hugely popular multiplayer online video game that’s set in a postapocalyptic world. Players work together with teammates to blast zombies and opposing teams and try to survive … and Epic works to entice you to spend money on upgrades.

It’s a great business … and business model … which is why Epic’s private market valuation has been soaring.

Earlier this month, Epic completed a $1 billion funding round, which raised its valuation to $28.7 billion. That’s close to double its valuation of $17.3 billion last August. Epic stands out in the video game world, in part, because it makes the Unreal Engine, the suite of software tools behind Fortnite, other games, and some TV and movie special effects.

Although Epic is a privately held company for now, it has been indicating that an initial public offering could be coming soon.

Moreover, Epic’s rivals in the game engine space — Unity Software Inc. (NYSE:U) and Roblox Corp. (NYSE:RBLX) — went public in September 2020 and March 2021, respectively. For its part, Unity went public at a valuation of $13.7 billion … and is now valued at $29.25 billion.

Lockdown Profits

Not surprisingly, the pandemic that kept so many of us locked up inside for so many months has been kind to the video game industry.

According to industry tracker Newzoo, global consumer spending on video game software jumped about 20% from 2019 to 2020, reaching nearly $175 billion.

Indeed, for gamers, social distancing is second nature to you whether you participate in chat rooms like Discord, Xbox Live, etc. Virtual interaction can be between you and other online friends or just yourself and the screen in front of you.

Video gaming can be a solo activity. If you’re imagining some kid in a basement playing “Minecraft” or “Grand Theft Auto” from dawn to dusk, you aren’t far off. But increasingly, gaming involves online competition among gamers who may or may not know one another.

As this mode of competition gained complexity and popularity, it came to resemble a sporting activity that is as intense as any outdoor sport. Hence, the term “eSports” made its debut on in 2015.

Professional gaming is an up-and-coming international phenomenon, complete with gaming arenas and teams of e-athletes. Yes, “e-athlete” is really a thing.

One year ago, I said the following:

I believe the video gaming and eSports industry has entered an explosive growth phase. The wick to that explosion may sputter a bit as the globe copes with the coronavirus epidemic … but that fuse has been lit.

And lit it has been. So far, the video gaming and eSports industry have shown no signs of slowing down.

Based on anecdotal evidence, the ranks of gamers worldwide have swelled significantly during the Covid-19 epidemic. After the crisis passes, most of these new converts will probably reduce their gaming time … but they won’t eliminate it.

Not by a long shot.

Big Business … and Getting Bigger

According to Mat Piscatella, executive director and video-game industry adviser for NPD Group, consumers in the U.S. spent a new record of $56.9 billion on video games in 2020, which is a 27% increase compared to 2019.

Globally, video game revenue surged about 20% last year to $179.7 billion, according to International Data Corporation (IDC) data.

Online gaming has no doubt given birth to the professional eSports phenomenon.

As its name implies, eSports are video-game-based competitions between two or more “e-athletes.” These new sports already boast a global audience of nearly 500 billion people, while also generating nearly $1 billion in total revenue.

Fortnite is in on the eSports game. Epic, for 2021, has put forward an eSports prize pool of $20 million, significantly up from last year’s total of $17 million.

Activision Blizzard Inc. (NASDAQ:ATVI) is the undisputed leader in the eSports world. It launched the first-ever city-based eSports league for “Overwatch” in 2018, and it kicked off its city-based “Call of Duty” league in January. It also operates Major League Gaming, the No. 1 online eSports broadcast network. While eSports is still a small slice of Activision’s overall business, it is a fast-growing one … and certainly a big part of future growth.

Take-Two Interactive Software Inc. (NASDAQ:TTWO) is another stock that’s big on eSports. It owns the popular “NBA 2K” series, which started a professional eSports league in 2018 with 17 teams, and the cool part is that all of them are affiliated with an NBA team.

It’s a great company. And along with Activision, Take-Two is one of the top 10 positions in ESPO.

I’m not recommending any video-game stock right now, but these are definitely companies to keep on the radar… and to maybe take a closer look at if the market goes into some kind of correction.

Note: This article originally appeared at InvestorPlace.

On the date of publication, Eric Fry did not hold (either directly or indirectly) any positions in the securities mentioned in this article. 

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest.