Coronavirus Helps, But There’s More to This Video Game ETF Thesis

All those stay-at-home and quarantine orders prompted by the coronavirus are having some positive investment implications, particularly for streaming entertainment and work-from-home stocks, among others.

While the reopening of the U.S. economy is still in its early innings, there’s already chatter that enthusiasm for streaming entertainment and some work-from-home equities is waning. Those concerns are plausible. After all, valuations on some of these names are through the roof based in large part on people being forced to shelter in place – a policy that simply isn’t tenable over the long run.
Conversely, there are some investment themes aided by the pandemic that were flourishing prior to COVID-19 and will continue to do so after the virus is quashed. Count video game equities and the related exchange-traded funds, including the Global X Video Games & Esports ETF (HERO), as members of that group.
Up 23 percent year-to-date and 13.52 percent over the past month, HERO is benefiting from stellar runs in names such as Activision (ATVI) and Electronic Arts (EA), just to name a pair.

More to the Story
It’s not unreasonable to be skeptical about the near-term fate of video game equities as more people say enough with being at home and return to enjoying life outside. In fact, it’s fair to say that video game stocks could be beholden to some of the same return-to-normal vulnerabilities as a streaming service or a video conferencing stock. However, data indicate sales of video game hardware (consoles) remain sturdy.
“Sony’s PlayStation 2 remains the best selling game console of all time, two decades after its release,” according to LearnBonds research. “Data gathered by Learnbonds.com indicates that by March 2020 approximately 1.56 billion game consoles of different brands have been sold globally with PlayStation 2 accounting for 10.07%.”
The dominant video game console makers are Sony (SNE)Microsoft (MSFT) and Nintendo. Still, only Nintendo resides in HERO (it’s a top 10 holding in the ETF) because Microsoft and Sony are large companies that derive significant portions of their sales from outside the gaming space.
Still, HERO, which follows the Solactive Video Games & Esports Index, doesn’t lack for console leverage. The fund has some semiconductor exposure and is heavy on software makers, such as Activision and EA. That’s relevant for HERO’s 2020 prospects because a console upgrade cycle is coming later this year with new versions of PlayStation and Xbox slated to come to market just before the holidays.

Of course, software makers know this and new installments in marquee game franchises will be trickling in over the coming months, including some that will launch around the debut of the new consoles. There are reasons to believe this upgrade cycle carries with it important investment implications.
“Despite the popularity of PS4, its sales might not surpass the PS2 considering that Sony is set to launch the PlayStation 5 in 2020,” said LearnBonds. “On the other hand, Microsoft has announced it will also release the Xbox Scarlett. With the upcoming PS5, Sony has assured gamers that additionally hardware enhancements like a much faster hard drive, a 4K Blu-ray drive, and a more adaptive controller in the console’s next iteration.”
Another Factor
Notice that HERO’s largest holding and one making significant return contributions this year isn’t a console maker or a game publisher. It’s high-flying NVIDIA (NVDA).
The chipmaker is a force in the cloud computing arena through its data center footprint, and there’s some cloud carry over to gaming that bodes well for the stock and HERO over the long term.

“Cloud gaming has multiple benefits for gamers. It’s much cheaper since there’s no need to buy consoles or gaming PC’s, and if the user’s smartphone or other connected device breaks or freezes temporarily while cloud gaming, the game can be picked up at the same exact spot later,” notes IHS Markit research. “The biggest benefit for cloud gamers, though, is that they can play any game they want, anywhere they go, and on any device they choose.”
Cloud gaming is still in its nascent stages, indicating it could be a compelling long-term growth frontier for HERO.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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