Monday 16 September 2019

John Lynch: 'Lucrative games market is a rough playground for investors'

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John Lynch

This is probably the truest statement of the obvious you will read this week: if you don't keep up with the kids, the world will pass you by.

I've already discovered that this was the case with music and fashion, and it is also true in investment - as I recently discovered when I happened upon the video games sector, one that until recently had passed me by.

That is a multi-billion blind spot and I should be casting around for forgiveness.

I thought I would rectify my neglect this week by zeroing in on a big player in the video game business called Activision Blizzard (AB). Anyone else new to this particular market will be astonished by the revenues it attracts.

The company is a leading global developer of interactive entertainment for video games consoles (Xbox, PlayStation), PCs and mobile phones. It also operates e-sports events and creates film and TV productions based on games.

The group is the result of a merger between US firm Activision and French group Vivendi. Based in California, it operates in more than 15 countries, including Ireland, with 10,000 employees. It has a market value of $39bn with revenues of $7bn.

Activision came about when game developers at the sector's trailblazer, Atari, demanded recognition and asked to be paid royalties, rather like musicians. Getting short shrift from their employer, they upped and established Activision.

The merger with Vivendi 10 years ago created the world's most profitable online and game publishers. It is not the biggest, however, that honour goes to China's Tencent group.

At the time of the merger, Activision was one of the world's leading independent publishers in game entertainment, and Vivendi was the holding company for Blizzard Entertainment, whose 'World of Warcraft' was then the world's best-selling game.

The completion of the transaction saw the merged company achieving leadership across all categories. Today it claims it has more monthly active users than Netflix has subscribers.

The group's three main game divisions, Activision, Blizzard and King Digital, each account for one third of total revenues. But Activision, helped by its wildly popular 'Call of Duty' game, is the most profitable with 40pc of operating profits.

Four of its games, 'Candy Crush', 'World of Warcraft', 'Call of Duty' and 'Overwatch' (the latter specially designed for e-sports), account for two-thirds of all revenues.

A lot of attention has been focused on the development of video games as a spectator sport. The company operates competitive live gaming events called Major League Gaming (MLG). Earlier this year, they signed a deal with Disney Sports Channel to bring the finals of its league on to the main sports channel.

It is unclear how the older viewer accustomed to athleticism and sporting ability will respond to teams of young people pounding on keyboards. In spite of the hype, MLG is not yet a profit blockbuster.

Revenue last year topped analysts' expectation at $7bn. Four-fifths of the revenue generated was online and the remainder from retail sales.

Over half of the revenues were generated in the US, with the remainder from Europe, China and Japan. However, this year the Chinese set up a political roadblock halting approvals of new games.

Operating income was $2.4bn but net income fell to only $273m following a significant tax payment.

Investors in the company were very pleased until recently. The group shares jumped 75pc in the year to September, reaching a record high of $84. Since then, it has plunged to $50 a share, the result of the stock market rout in October and November.

This industry has a low entry barrier with thousands of new games launched each month.

So only big companies with strong brands can survive. Activision Blizzard is one such company but I think this is a share to pass on.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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