Video game stocks are too risky right now, says this investor

Volatility seems to be the norm with video game stocks but these days there’s now even more reason to be cautious about the sector, says fund manager Cameron Hurst of Equium Capital Management.

Hurst argues that with the disruption caused by free-to-play games like Fortnite, predicting winners and losers in the sector just got a whole lot more challenging.

The roster schedule has always been a go-to figure when it comes to companies like Activision Blizzard, Electronic Arts and Take-Two Interactive, as investors look to see what’s cooking with the latest editions of games such as World of Warcraft and Madden NFL. But more variables are now being added to the mix, including competitive gaming, where Activision Blizzard’s Overwatch league just completed its second season.

As a sign of the league’s potential, this year team owners reportedly paid between $30 million and $60 million in expansion fees to join Overwatch. In 2018, almost 400 million people worldwide watched e-sports, according to analysts from Needham, with 454 million projected for 2019 and rising to 645 million viewers by 2022.

Add to that the 2017 monster runaway hit Fortnite, which has ushered in the streaming free-to-play platform, and the dynamics in the gaming space are definitely changing, said Hurst, chief investment officer at Equium, who spoke to BNN Bloomberg on Thursday.

“Now, the whole backdrop is changing,” he says. “This space is being disrupted now by free-to-play games like Fortnite, so you’ve got all kinds of pricing dynamics changing…”

“[Video game companies] have had an interesting run and they do tend to move as a group,” said Hurst. “The idiosyncratic aspect of this is when they come out with a new Call of Duty, there are people who follow these games and play them religiously and always a high attribution of the volatility was due to when things were announced and released.”

“Now, the whole backdrop is changing,” he says. “This space is being disrupted now by free-to-play games like Fortnite, so you’ve got all kinds of pricing dynamics changing. It’s not just about buying the game and having a console, it can be streamed and the whole thing is changing. That adds to the volatility.”

“You have big players coming into this now who can afford to put big money behind the free-to-play, so the whole model is changing. The other aspect is our overarching concern about where we are in the market and what’s happening,” Hurst says.

The share prices for video game stocks Activision Blizzard, EA Sports and Take-Two have all had comeback years of a sort, with ATVI notably rebounding stronger in recent weeks. All three are trying to return to all-time highs set during the second half of 2018. Year-to-date, ATVI is now up 16 per cent, Take-Two is up 17 per cent and EA Sports is up 19 per cent.

Take-Two, which owns the Grand Theft Auto franchise, surpassed expectations in its latest quarterly report, delivered in early August. Many pointed to the company’s spike in revenue from digital in-game purchases as a contributing factor. The company could wow again in its next quarter, as sales for Borderlands 3 have reportedly been strong.