For those who didn't grow up as avid gamers or as part of the millennial or Gen-Z age demographics, the idea of 300 million people around the world spending their time watching other people play video games might sound like the backdrop for a sci-fi movie. Except it's not a futuristic scenario. Competitive gaming, also known as esports, already draws massive viewership -- and it's serious business.
Gaming videos are the most-watched content category on YouTube. Amazon says that its Twitch platform (which is mostly used to stream gaming videos) reaches roughly half of America's millennial-aged males. Professional gaming events are even bringing in massive real-world audiences, with major tournaments being held in sold-out top-tier venues including Madison Square Garden and Barclays Center in New York and Staples Center in Los Angeles. And the esports boom is only just getting started.
Image source: Getty Images.
Why esports will only get bigger
Esports stands as one of the fastest-growing content categories in the world. Research group Newzoo estimates that industry revenue will surpass $900 million this year and is on track to reach $1.4 billion in 2020 as advertisers and sponsors flock to establish themselves in the space. R.W. Baird expects that sales will be even higher, targeting industry revenue of $1.8 billion in 2020 without factoring in sales from gambling-related esports businesses.
Those projections are only scratching the surface of what the market could be worth down the line. Just as advertisers pay to have their logos featured during sports broadcasts and shell out big bucks for stadium-naming rights, a growing number of top brands are seeking similar promotional opportunities in the gaming world.
Esports also has the potential to drive merchandise sales. Broadcasts help promote the sale of toys and other branded products based on the underlying intellectual property (IP), and professional teams are already rolling out logo-emblazoned clothing and other sponsored gear.
While it is in a relatively nascent state, the esports market appears to be poised for a prolonged period of rapid expansion that could create appealing opportunities for investors. With that in mind, it's worth getting to know some of the leading players in the space.
Activision Blizzard
Activision Blizzard's (ATVI +0.00%) assortment of top-notch development studios, valuable IPs, and early efforts to build foundations in the esports space make it a strong candidate to benefit from the growth of gaming as a spectator sport. In addition, advertising, sponsorship, licensing deals, and competitive gaming leagues help promote the underlying titles -- a dynamic that could be hugely rewarding for publishers like Activision.
The company launched an official league for Overwatch, a team-based game in the first-person-shooter genre, in January, and management expects that the initiative will be profitable in its first year. Achieving profitability in Overwatch League's (OWL) first season is even more impressive because the project almost certainly spurred sales of the base title and additional in-game content purchases, and those benefits aren't being included in the calculation.
The company sold the ownership rights to the first 12 teams in the Overwatch League for roughly $240 million -- with plans to expand to 28 teams -- and will continue to collect a share of ticket sales and broadcast revenue. In addition to carrying OWL on its own Major League Gaming platform, Activision also signed multiyear deals with Disney and Amazon's Twitch.
The Overwatch League may be just the beginning for Activision Blizzard in the esports space. The company's Call of Duty and Hearthstone franchises also attract huge viewership online and could see larger pushes into esports in the near future, and many of the publisher's future projects will likely be developed with esports in mind.
In its recently completed second quarter, Activision Blizzard beat expectations with net revenue of $1.64 billion. The stock trades at a reasonable forward price-to-earnings ratio (P/E) of 23.
Electronic Arts
As the leader in video games built around popular sports leagues like the NFL and FIFA, Electronic Arts (EA 0.17%) has a natural jumping-off point for building its position in esports. The company's FIFA and Madden series are some of the most consistently successful franchises in gaming history and should help the company continue to expand its esports audience. EA has already had Madden and FIFA tournaments broadcast on networks including ESPN and The CW, and cross-promotional events with leading sports leagues could prove to be very lucrative.
EA has found big success in bringing esports tournaments to the masses. Its recent FIFA tournament attracted roughly 20 million competing players and whittled down that pool to 32 finalists who were featured in the FIFA eWorld Cup Grand Final 2018. Making your audience participants in a large-scale competition that concludes in a high-profile broadcast event is an entertainment model that's pretty innovative, and it could pay off in a big way for EA.
It's worth pointing out that Electronic Arts' dependence on licensed properties represents a potential fault line in its esports expansion efforts and could limit opportunities in areas like merchandising. The company does have strong original IPs, however, including Battlefield, and overall, it looks to be in good position to benefit from the growth of competitive gaming. The heightened focus on multiplayer games has already played a huge role in expanding high-margin in-game purchases and helped the company more than triple its trailing earnings over the last five years. EA stock has a forward P/E of just under 23.
Tencent Holdings
Tencent Holdings (TCEHY 1.01%) already has a market capitalization of roughly $430 billion, but there's probably no other megacap stock that's better positioned to benefit from the rise of esports. The Chinese multimedia giant is the world's largest video game publisher by revenue, and the synergies between its online gaming, social media, and advertising businesses make it a strong candidate for investing in the esports space.
If you were to make a list of the top four most popular games in the world right now, Tencent has a hand in all of them. The company developed mobile megahit Honor of Kings and owns Riot Games, the company responsible for the hugely successful action-strategy game League of Legends. Tencent also publishes the mobile versions of PlayerUnknown's Battlegrounds and owns a 40% stake in Fortnite creator Epic Games.
In addition to its strong development and publishing positions, Tencent's other big advantage is that it owns WeChat, China's leading social media platform, which surpassed 1 billion monthly active users earlier this year. This gives the company a huge edge in the gaming and esports spaces because it opens up more sales and cross-promotional opportunities than its competitors have access to. WeChat is built into many of the company's titles and has a payment processing function that helps Tencent bring in sales from third-party content -- two advantages that give the company huge growth opportunities if esports takes off on mobile platforms.
Tencent stock has already climbed roughly 375% over the last five years. Even so, the shares could still have substantial upside given the company's presence in popular games, leading position in social media, and long-term tailwinds in the Chinese market.
