A shrinking map by the minutes, 100 or so soldiers mostly hiding but some fighting, and there shall only be one winner. That's called a Battle Royale mode and it is the latest video game craze. Remember, Candy Crush and PokemonGo? This is another one of those! The Fortnite game is the reason behind the battle royale craze of 2018. The game is developed by Epic Games. By some estimates, fueled by the success of Fortnite, Epic Games is now valued somewhere between $7 to $14 Billion. So far, it's just a craze, and nothing interesting for us, the stock market investors. Epic Games is a private company. But wait a minute! Tencent Holdings - the Chinese video game giant - owns 40% of the company. Clap your hands, 'cause things are getting interesting!
On today's edition of Stock Card Weekly, we are looking at three video game companies that are releasing a Battle Royale mode to see which one is worthy of a spot in our watchlist and ultimately finds its way into our long-term portfolios. Today's contestants are Tencent Holdings, Electronic Arts, and Activision Blizzard.
Note: All numbers stated are based on the last available data on 9/14/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ Tencent Holdings (Price to Earnings ratio: 32.93)
Tencent Holdings is the gaming giant of China and world's biggest video game company, which also owns 40% stake in Epic Games, the developer of Fortnite. The company is a direct beneficiary of the Fortnite success. However, things are not going very well recently for Tencent. Seems like they have had some issues to sort out with game approval process that has caused the company to declare the first-ever quarter with a decline in their profit. This is of course a risk that comes with investing in the Chinese companies. We need to consider the risks that come with the impact of regulations and government ownership on the stock price fluctuations. Having said all that, Tencent is definitely a not-to-be-missed opportunity for risk-takers. It owns several successful game studios such as Riot Games and PUBG. Riot Games is one of the largest eSports game franchises in the world of "League of Legends". Tencent also is the publisher of PUBG (PlayerUnknown's Battlegrounds) which is the first game that created the Battle Royale craze. Among many other businesses, Tencent owns an instant messenger service called Tencent QQ and one of the largest web portals, QQ.com. It offers WeChat which is one of the world's most powerful apps. It also owns the majority of China's music services (through Tencent Music Entertainment), with more than 700 million active users and 120 million paying subscribers according to Wikipedia. At 32.93 price to earnings ratio, Tencent Holdings is a cheap bargain that comes with the a baggage of regulatory risk. In the Battle Royale of gaming stocks, it's hard to ignore this giant.
Visit Tencent Holdings' Stock Card.
$$ Electronic Arts (Price to Earnings ratio: 51.28)
Electronic Arts recently announced that it is delaying the release of its blockbuster video games title - Battlefield V - by four weeks. The delay is partially because the company plans to introduce the Battle Royale mode. Battlefield is one of the most popular first person shooter IPs that will include a Battle Royale mode as well. That makes this delay note-worthy. As muchs as the news is interesting for the player, the delay means there will be four fewer weeks in the current fiscal year to sell the game and that has got the analysts worried. For example, analysts at Merrill Lynch decided to reduce their estimated price target for EA for the next 12-18 months. While the concerns are valid, for long-term investors a few weeks of sales is a blip in the lifetime of a market leader such as EA. If you read through the managements' note, the delay in the release of the game is actually a strategic move. They postponed the game because of two reasons: 1) They have been receiving a lot of feedback from the gaming community about the recent monetization scheme which was introduced in a few of their games earlier this year. Such feedback is extremely valuable, and it is ingenious of the management to take the input and make sure they refine and polish their new game releases according to the feedback. 2) The change in the timing is expected to reduce the competitive pressure and put a time-gap between the release of the Battlefield game and other competitors such as Red Dead Redemption 2 by Take-Two Interactive and Call of Duty Black Ops 4 by Activision Blizzard which are also scheduled to be released around the original release date. As you can see on the EA's Stock Card, not only is the dip meaningful dragging the stock price to an undervalued range, but also the reasons behind the dip which are strategic, and we have the information to believe that there is no real change in the operational strength of the company.
Visit Electronic Arts' Stock Card.
$$$ Activision Blizzard (Price to Earnings ratio: 125.63)
While Fortnite was the talk of the town, Activision Blizzard was hard at work at their own battle Royale Game. What do you get when you smash the world's most famous first-person shooter IP, with the most crazed video game mode? You get Call of Duty, Battle Royale mode! (Duh!) Since the company released its open beta, the stock has been up close to 10%. The critics are raving about it and the video streamers are sharing their excitement all over. Many of the loyal Call of Duty fans, who were not sure whether they are going to buy the new release of the game scheduled for later in the year, now are counting down to the day they can get to download the full game and get to the battle. Beyond the Battle Royale mode, much like its rival Electronic Arts, the company is on track to benefit from the emergence of the eSports category and has already invested significantly in developing its eSport line of business. The investment includes the development of an eSport league, athlete drafting and recruitment rules and the development of the world's first eSport stadium for its popular Overwatch franchise. Activision Blizzard is a monster player in the video game industry.
Visit Activision Blizzard's Stock Card.
Who is our watchlist-worthy pick?
Which of these battle royale stocks is worthy of a spot in our intelligent investing watchlists? All three are well-managed companies in a strong market. It's hard to choose, to be honest. But, if watchlist is a place where we put the companies that are worth our attention and we wish to monitor for a while before jumping in, I have to say Tencent is my watchlist-worthy winner. Especially, at such a cheap price to earnings ratio, the company is worth considering. The other two are already strong companies and they already belong to most of the long-term portfolios out there. And, since we are focusing on Battle Royale mode, Tencent is clearly the note-worthy one. Not only do they own 40% of Epic Games - Fortnite, but also publish PUBG game, which is the first Battle Royale game created before Fortnite's success. The opportunity is just so big for the company in China to make money off of this new craze in the video game industry that it is undoubtedly the winner of today's Stock Card battle.
Hope you enjoyed this episode. If you are a premium member, log in to read about Stock Card team's final decision. If not, write back to me or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.
You or someone you know has the dibs!