Why investors should keep an eye on video games

Epic’s ‘Fortnite’ has been an overnight success
The video games sector will take a great leap forward when consumers start streaming them like films and music. Stephen Connolly looks at how to invest.
The great and the good of the global video-games sector were out in force in early June for their annual get-together in Los Angeles. The Electronic Entertainment Expo – or “E3” – draws a big crowd, showcasing the top games and product innovations. For investors trying to assess who will be the winners in an industry going through profound change, this year was especially important.

E3 highlights the imagination and advances in the industry. Whether mobile-phone gaming, breakthroughs in virtual reality or tie-ins with films and popular culture, the future for gamers is exciting.
Short-term turbulence
Beneath the surface, though, the sector has faced problems. Mixed performances from established games and under-performing new ones have unsettled analysts. Activision Blizzard, which has a strong portfolio of billion-dollar games including Call of Duty, and Electronic Arts, producer of Battlefield, are among those to have disappointed.
Resistance from customers to “in-game” add-ons to squeeze out more revenue has had a negative impact. The overnight success of free titles such as Epic Games’s Fortnite has prompted a rethink of how big publishers serve their customers. And censorship in China has slowed sales for some publishers.
It’s inevitable that a sector moving from the fringes to the centre of the entertainment industry will experience bouts of adjustment. Rapid audience growth, new product formats and advances in technology all change what, how and on which devices gamers want to play. This puts pressure on business strategies, denting profits and share prices.
Repositioning like this can make for choppier conditions at the individual stock level, but hasn’t held back the sector’s overall advance. The ETFMG Video Game Tech ETF – a proxy for the global industry – has gained 12.4% year-to-date. Positive, but not as good as the MSCI World Index, which is up 19.5%. Take a more reasonable three-year view, however, and it’s up 58%, well ahead of the index’s 42%.
The shorter-term underperformance doesn’t seem to have damaged longer-term optimism.

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