How to power-up your portfolio with ASX video game stocks
Computer game makers are following the “software-as-a-service” trend away from single sales to recurring-revenue models — a trend reflected among the handful of ASX-listed gamers.
“The business model of gaming is pivoting from a reliance on one-off titles to a model built on subscriptions, in-game purchases and lucrative franchises,” Morgan Stanley’s Head of US Internet Equity Research said in a research note last week.
While Australia doesn’t have blockbuster listed gaming companies such as Activision Blizzard or Electronic Arts, there are a handful of ASX stocks that offer exposure to computer games such as mobile gamer Animoca — which perfectly fits Morgan’s Stanley’s description.
Animoca (ASX:AB1) believes the global gaming market will reach $73 billion in 2018 with some 2.2 billion players.
The explosion in players has been driven by a transformation of phones into gaming devices — and a broadening of gaming content from shoot-em-ups for teenage boys to “casual gaming” settings with universal appeal.
Animoca’s revenue fell last year as it cut costs (including reducing staff from 110 to 70) and offloaded non-core assets — including 318 games sold to fellow ASX-listed gamer iCandy.
Revenue subsequently fell 25 per cent to $6.5 million for calendar 2017 while losses widened to $8.3 million.
But investors have been impressed by Animoca’s efforts to streamline its library and focus on a few key game franchises such as Crazy Kings and Crazy Defense Heroes.
The stock went on a huge run after Crazy Defense Heroes — a tower defence and card-collecting mobile game — was downloaded 260,000 times in its first week, generating $202,000.
Animoca reached 10-bagger status in little more than a month and has since made a string of announcements including licensing the MasterChef reality TV brand with iCandy.
Animoca raised $3.3 million in January and further powered up its cash position with $1.3 million revenue in five weeks from a hit game, Crazy Kings.
iCandy Interactive (ASX:ICI), which bought those 318 games from Animoca in November for $5 million, is another ASX mobile gamer.
The game maker has been suspended since November pending the outcome of an acquisition (which fell through) and legal matters due in the federal court later this month.
With its newly acquired games, iCandy says it expects to reach as many as 348 million gamers, making it “one of the most powerful gaming communities internationally”.
For the calendar year, iCandy reported $1.7 million in revenue and a loss of $1.8 million.
iCandy planned to develop its own cryptocurrency for in-game transactions but the ASX stymied that plan. It still supports a game publishing network, Nitro, which is based on cryptocurrency.
“The video game industry and cryptocurrencies are [complementary] to each other,” iCandy group chairman Kin Wai Lau has previously told Stockhead.
“There are a lot of micro-transactions going on [among gamers] and developing an efficient way to make micro payments over a network is a big step forward for the video game industry.”
iCandy (ASX:ICI) also already generates income from digital ads in its game apps.
The eSports phenomenon
A number of ASX-listed stocks are involved in so-called “esports” — competitive gaming that operate revenue models similar to traditional sports.
“eSports is on track to be a $US1.5 billion industry by 2020 as it emulates the business models of major league sports, complete with sponsorships, advertising, media rights, ticket sales and merchandise,” Morgan Stanley said in a January research note.
The global audience for eSports is set to surpass 385 million this year with the total market expected to grow to $US1.5 billion ($1.9 billion) by 2020, according to researcher Newzoo.
eSports Mogul (ASX:ESH) operates Mogul Arena, a platform that automatically creates tournaments for popular games such as CS: GO, DOTA 2 and League of Legends — and matches players.
Mogul Arena just launched in December and isn’t making much money yet. It reported only $76,128 in revenue for calendar 2017 and a loss of $8.5 million.
Arrowhead (ASX:AR1), soon to be renamed Emerge Gaming (ASX:EM1), is raising $5 million to buy privately held eSports play Gaming Battle Ground.
HT&E (ASX:HT1) – formerly known as APN News and Media – has plans to launch a national competitive gaming league with founding teams from most major cities.
‘Gamifying’ real-world industries
There are also a number of other ASX-listed stocks exposed to gaming through the trend towards “gamification”.
Gamification is the process of applying video game mechanics in “real world” applications — everything from bank accounts to workplace safety — to motivate participation, engagement, and loyalty.
One estimate puts the gamification market at $US23 billion by 2022.
KNeoMedia (ASX:KNM) and Adherium (ASX:ADR) offer local exposure to gamification.
Its flagship game KneoWorld is set in a futuristic world where students take part in numeracy, literacy, science, arts and memory tasks through a gaming setting.
Feedback is sent to teachers to monitor performance and allow for further targeting.
It’s early days for KNeoMedia. The gamification expert banked only $264,401 in the December half and made a loss of $1.3 million.
But after proving the concept in the New York public school system, the gamification expert is now expanding into other US States.
The shares have taken off from 1.5c in the middle of last year to around 10c today.
Meanwhile Adherium applies gamification in the health sector to get patients sticking to their medication regime.
Among other products, Adherium makes a range of “Smartinhaler” devices that connect to an app via Bluetooth and give children updates on their phone about how well they’re using their puffer.
Adherium reported $2.6 million revenue for the December half — a 92 per cent jump on the same period last year.
It made a $5 million loss on the period.