Escaping Reality: Investing In Gaming's Secular Trends

| About: PureFunds Video (GAMR)

Summary

Our lives are mundane, and the best way to avoid that reality is to find ourselves a new one.

Video games, even more than TV, movies, and social media, offer the escape we so desperately want.

Even if current valuations are high, the video game industry will go from niche to mainstream in the next few decades.

Life has always held little for many. We go to school, we work, we get married and have kids and grandkids, we retire, and we die. Some, the lucky, the hard-working, the opportunistic, break free and live the life they want—perhaps the luckiest simply enjoy the blandness of this process.

While this formula has rung true for some two hundred years now, today, we have untold options to escape this boredom. Movies, reality TV, social media, internet porn, video games. All of these offer an idealized world, a happy world, a world that isn’t ours—but could be. At the click of a button, we’re sent to a land of eternally smiling beautiful people, enjoying life and doing what they love. And on the rare occasions they’re unhappy or frustrated, it’s all in the name of some honourable cause, a struggle which they undoubtedly overcome by the end of the episode.

We toil away in our lives, hoping desperately for a lottery ticket or some legendary love to whisk us away into a world that could otherwise never be ours. Deep down, we know that this is all we get. In our grudging acceptance, we turn to these escapes—a weekly release of The Bachelor, a glimpse at the high school prom queen’s new beachfront property on Instagram, some hours drained in Call of Duty. We’re spending our lives trying to live different ones. Nobody watches the scenery pass by on the train or bus or plane anymore—we’re absorbed in Candy Crush and Facebook.

Out of all these terrifying options we have to waste our time on, the most engaging one—fully engaging, even—is gaming. While all “technology is designed to hook us,” gaming does it best. Netflix only require us to sit and observe, to take in passively as the anchorman or the protagonist narrates. Social media necessitates the dreaded acts of scrolling and “liking” things, incredibly addictive and hard to pull away from, but still manageable eventually. But the genius of video games is in how they trap us. Like Chinese handcuffs for the brain, the more we play, the more we believe and the more we must play. We invest our time, efforts and emotions, and each movement in the game “delivers a steady dose of small rewards that make sense given the game’s rules.” Pausing, turning away, or closing the game becomes a test of will, and an insult to yourself—by exiting, you essentially say, “I completely wasted the past two hours on something virtual and irrelevant. As a Guardian article puts it, “you have so much to lose… the last thing you want to do is admit defeat,” or even admit that you spent time in a world that doesn’t even exist. What’s more, the beauty of full-screen is that you don’t even see the “X” in the top right or left.

This might sound like bad philosophy—and to an extent, it is. But all the most successful games of the past decade have not been great games, but great worlds. Look at Minecraft, GTA V, Skyrim, Diablo III, all the Pokemon series (including Pokemon Go). Success is not smooth mechanics or a realistic engine or fun DLC. Success is escape, and whatever game helps us escape better succeeds more. A high-achieving college football player with great grades and high ambitions started playing World of Warcraft because “it was basically a much better alternative world to the real one,” and he went on a “45-day binge… put on 40 pounds of fat… and ignored hundreds of phone calls." Indeed, the only reason Take-Two (TTWO) is afloat is because of its Grand Theft Auto franchise, the best way to leave our world and jump into another just like it, except one where you’re rich, drive fast cars, can beat up old ladies without repercussion, and can solicit prostitutes without all the nasty real-life consequences.

With the metric of not game-making or profit-squeezing, but world-building in mind, let’s briefly compare Activision-Blizzard (ATVI) and Take-Two (TTWO).

ATVI has eight billion-dollar franchises and many other tremendously successful titles, such as Call of Duty, Skylanders, Destiny, World of Warcraft, Heroes of the Storm, Overwatch, and Starcraft. With the possible exception of the first-person shooters (FPSes), many of its franchises feature incredibly immersive worlds with captivating lore and backstory. Even Overwatch, a primarily shooting-based game, has numerous comic releases and animated shorts that drive gamers’ investment in not only the gameplay itself, but also the characters and the game-world. Call of Duty, perhaps the most notable potential outlier, beats out its closest competitor, Electronic Arts’ (EA) Battlefield, by virtue of its engaging and extensive single-player campaign. With its market-leading portfolio of content and verified ability to generate new, compelling works, over the long term (5-10+ years), I believe it’s poised for outperformance, especially considering industry tailwinds.

TTWO, on the other hand, is mainly driven by a few key franchises: Grand Theft Auto, Bioshock, and its sports games (NBA/WWE/NHL, etc). Grand Theft Auto may be the most successful example of world-building ever, perhaps only to be transcended by future augmented reality games (such as Pokemon Go). Immersion in the game is beyond belief, and its strong sales figures back that. Bioshock is often heralded as the video game example of art, and that’s partially because of the powerful themes it deals with, in addition to the engaging world it builds—sounds just like a good novel, doesn’t it? The sports games, of course, offer its players a chance to live lives they always wish they had the chance to—of a baller, a hockey player, a wrestler. TTWO has a compelling portfolio and strong content creators (perhaps even stronger than ATVI’s), but its reliance on a few key franchises reduces its value as an investment.

While I’m not a big fan of ETFs, for those that want to hedge their risk and simultaneously play the secular trend in video gaming, PureFunds has a video game ETF (GAMR). The expense ratio, at 0.75%, is rather high, and the daily volume, at only ~20,000, is rather low, but it does capture mobile, console, and PC content-creators. With 36 holdings, it's rather diversified, and its top five holdings are currently Konami, NCSoft, Nintendo (OTCPK:NTDOY), Nexon, and Ubisoft. The ETF, from the perspective of its largest components, is rather Asia-focused currently, but given both the massive market size and mobile gaming audience, this may be a strong demographics play.

GAMR doesn't have the longest history, as it was only recently launched, but it has shown admirable returns and acceptable volatility. ATVI has been on a tear this year. While GAMR has demonstrably less exaggerated gains, it has otherwise matched the increasing optimism about the gaming industry, outperforming the SPX by 3x. In addition, GAMR offers a modest but still nice-to-have dividend of 0.45%.

To say I’m bullish on the video game industry is an understatement. Look beyond the data, the number-crunchers and projections by analysts trying to justify their yearly salaries. Look at our isolation, our desperation, our hopes for something more than the lives we have. Video games, even more than the silver screen, provide us that escape. People are seeing that, and in 10, 20, 30 years from now, gaming will no longer be a niche hobby—it will become a way of life. ATVI and TTWO may be overvalued in the near term, and pullbacks will most certainly occur. But if there’s a five-bagger or ten-bagger that we can see today, it’s in the gaming industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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