Video Game Valuation Impacts of COVID-19 -- Needham & Company

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From a valuation perspective, we believe the video game industry is the media segment that benefits most from the COVID-19 pandemic. Knowing how long COVID- 19 lasts is unimportant to our video game valuation thesis because video game companies benefit near term and long term from rapidly rising hours played, broadening demos, more new games tried, higher in-game spending, and limited/no live sports on TV during the pandemic. We recommend purchase of EA and ATVI, based on this research.

Key Data Points Underlying Our Investment Conclusions Include:

1. 2020_Revenue_Upside. The US video game market is now expected to generate nearly $37B of revenue (as of New Zoo's May 2020 report), up 9% y/y above approximately $34B of 2019 revenue (from New Zoo's November 2019 report). Revenue upside is being driven by more new games sales, more in-game spending, and more advertising revenue from watching others compete at esports or streamers playing video games while narrating.

2. Play_Time_Impact. Gamers say they spend 3 hours more per week playing video games during the pandemic than they did pre-COVID according to an April 2020 Nielsen poll. ATVI believes that in-game spending is 90% correlated to time spent playing.

3. Viewing_Impact. COVID-19 has accelerated the viewing trend away from TV and toward video game streaming platforms such as Twitch and YouTube Gaming to watch others play video games with accompanying narration and chatter. US Twitch average viewership peaked in April 2020 and continues to show strong engagement with over 2mm US viewers watching over 1.6B hours in July 2020, even as lockdown measures were eased, according to Twitch Tracker.

4. Esports_Impact. Esports competitions have experienced increased engagement owing to the pandemic. Monthly viewership of esports competitions is expected to reach 35mm, growing 15% y/y according to a July 2020 study by eMarketer. A May 2020 survey by CivicScience found that 10% of US respondents ages 18-24 started following esports events after the top US sports leagues canceled their seasons.

5. Betting. Esports competitions comprised the majority of wagering during the pandemic when live sports were dark in 2Q20. In fact, esports betting attracted 20x more customers vs pre-pandemic levels and 40% of esports betters had never placed a bet on esports before, according to Odds Matrix.

6. Stocks. In this report, we quote EA, ATVI, TTWO, ZNGA, GLUU, MSFT and NTDOY executives from their June Q earnings calls about how COVID-19 is benefiting their businesses. All video game executives attributed increased engagement and raised financial guidance, at least in part, to COVID-19. We believe many of the same fundamental upside drivers also benefit their business models longer term. Our favorite stocks in the video game space are EA and ATVI.

Key Takeaways From this Report

1. EA's player acquisition in Madden NFL 20 and FIFA grew 140% and 100% y/y, respectively, during the June quarter.

2. ATVI's player base grew 30% y/y and time spent playing games grew 70% y/y, driven by time spent playing Call of Duty up 8x y/y during 2Q20.

3. More_Hours_Played. Gamers spend almost 3 hours more per week playing video games during the pandemic than they did in 1Q20, pre-COVID, according to an April 2020 Nielsen poll.

4. US_Video_Game_Revenue_Growth Rate will be Nearly 2x normalized levels in 2020, owing to COVID-19 lock downs, according to Statista estimates.

5. Advertising. US video games are projected to generate $1.6B of revenue in 2020, up 23% y/y, according to a July 2020 study by eMarketer, driven by elevated viewing levels. For example, StreamLabs estimates that 2Q20 viewing hours exceeded 7.5B hours, up 97% y/y, in Q2 '20. Americans spent almost 2 hours per week watching other people play video games in March 2020, according to Limelight Networks.

6. Twitch's average viewer base is up 73% y/y during COVID-19, and Twitch experienced the highest number of average concurrent viewers in its history at 2.5mm in April 2020, up 56% m/m, according to Twitch Tracker.

7. YouTube_Gaming_Live's average concurrent viewership is at an all-time high, increasing 15.5% q/q.

8. Facebook_Gaming experienced a 371% increase y/y in the number of unique channels it offers in Q2 '20, in part because it merged with Microsoft's Mixer platform.

9. Esports. According to an eMarketer July 2020 report, monthly viewership of esports competitions is estimated to be 35mm in 2020, up 15% y/y, driven in part by 15% of respondents saying they watched esports competitions in lieu of live sports during 2Q20.

10. Esports_Betting. Since the beginning of March, several bookmakers say they have seen their esports betting volumes grow 40x the average. 41% of players who did not place bets on esports are now esports betters, according to a May 2020 report by Odds Matrix. A ProdegeMR survey from April 2020 found that 36% of UK gamblers had bet on esports in the past last three months.

Link to full 15-page report, with disclosures.

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