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Ellen Haenszel, Senior Consultant contributed to this article.

What do the Milwaukee Bucks, Paris Saint-Germain F.C., and the New York Yankees have in common? Aside from being professional sports teams, all have an active investment in eSports. The term “eSports” describes the rapidly expanding community of professional, competitive videogames and presents a potential investment opportunity across a variety of industries.

Last year’s League of Legends World Championship sold out the Los Angeles Staples Center in less than an hour. While the arena seats only 21,000, an additional 43 million tuned in online—for context, the 2016 NBA Finals Game 7 broke records with 30 million viewers—with past eSports events broadcast in more than 15 languages for viewers around the world. In another corner of the eSports arena, Activision Blizzard’s (ATVI) game Overwatch has inspired a minimum-salary, professional league with city-based teams, the first of its kind. While the eSports community gains traction, it’s unclear whether the trend will translate to financial prosperity for the parties involved.

As video games and electronics are a mainstay of cyber-Monday sales, it's appropriate to look at opportunities for investment in eSports and related business lines—focusing on direct and upstream exposure. Who wants to play?

Video Game Producers Are Outperforming

The first and most obvious area to invest in the eSports business is through game producers themselves. To get a better picture of the competitive landscape, let’s compare Smart Phone Manufacturing, a $247 billion industry, with Games Software, coming in at about 22% of that at $53.2 billion. For comparison, the Games Software industry is far less consolidated than Smart Phones, with only 42.5% of the revenue concentrated in the top five players, compared to nearly 99% in the Smart Phone industry.

Two of the largest domestic players in this industry are Activision Blizzard, Inc. and Electronic Arts, Inc. Even those unfamiliar with the gaming industry will recognize the name Candy Crush, a mobile game cash cow produced by King Digital Entertainment, Activision Blizzard’s largest subsidiary.

 Two of the largest domestic players in this industry are Activision Blizzard, Inc. and Electronic Arts, Inc

Over the past year, Activision’s price is up 47.7% followed closely by Electronic Arts, which is up 37.7%. If you got in early, a $100 investment in Activision back in 1998 would now be worth $4,548. Pivoting from price performance to fundamentals, if historical trends are any indication, the holiday season may be the ideal time to invest. Looking at the fourth quarter of 2016, which encompasses Black Friday, Cyber Monday, and additional holiday sales, Activision Blizzard reported revenues of $2 billion, a period-over-period increase of 28.4%. If consumers move toward digital copies of these games (which are sold at the price point as physical copies, but lack the production cost) these companies would see their margins (and profits) continue to grow. Activision Blizzard reported revenues of $2 billion, a period-over-period increase of 28.4. If consumers move toward digital copies of these games.png

Though Gaming Software companies have a huge upside potential, there are inherent risks; the gaming industry is heavily dependent on fads. What drives revenue now may dwindle in a month or a year. Investors in this space should pledge to follow and track the latest and greatest games from mass market and amateur producers alike. Though some games persist in popularity for decades, it is safe to assume that the eSports community will continue to adopt new games and producers in the long run.

Other Opportunities for Growth?

If the popularity and scope of eSports continues to expand, there may be trickle-down effects to more “traditional” areas of sports—apparel deals, broadcasting services, and ad revenue. In exchange for logo advertisement, Nike reportedly paid $1 billion for an eight-year contract with the NBA and $1.1 billion for a five-year contract with the NFL. Could there be similar opportunities generated from eSports teams?

Although online broadcaster “Twitch” is the current provider for most eSports coverage, Disney’s ESPN provides news, and in some cases, live broadcasts for games like League of Legends, Dota 2, and more. As eSports become more mainstream and profitable they will naturally transition to paid streaming with commercials and sponsors. Evaluating these mainstream sports avenues is difficult when eSports is in its infancy. With eSports branching from more traditional athletics, new players in apparel, broadcasting, and advertising may risk their futures for a potential first-mover advantage. 

Powered by Semiconductors

As a high-level play on the growth of gaming and eSports, investors can look to the technology that powers games and their systems: silicon-based semiconductors. Semiconductor Manufacturing is a $330 billion market. This dwarfs the Smart Phone Manufacturing and Games Software industries ($247 billion and $52.2 billion, respectively). With eSports expanding, more players and fans will demand access to faster computers, better graphic processing units, more efficient flash memory, and other silicon-based products.

S&P 500 constituent Nvidia Corp. (NVDA) earns 93% of its revenue from the Video Multimedia Semiconductors sub-industry and over the past year, its performance places it among the S&P 500’s top-five performers. With a one-year price return of 129%, Nvidia has surpassed the performance of the Gaming Software industry.

Even if they are not direct suppliers to the eSports industry, other semiconductor manufacturers can provide exposure to eSports and gaming. Semiconductors produced by companies such as Advanced Micro Devices (AMD), Micron Technology (MU), and Intel (INTC) drive machine learning and artificial intelligence used by Amazon, Facebook, and even security trading platforms such as FactSet’s Portware.

With relation to gaming, AMD manufactures custom chipsets that power Sony’s PlayStation and Microsoft’s Xbox. Last year, Sony sold 6.2 million PlayStation 4 units during the holiday season, largely thanks to Black Friday and Cyber Monday sales. These holiday sales accounted for over 10% of Sony’s FY16 unit sales goal.  Microsoft may experience similar results this holiday season given the recent release of the Xbox One X.

As we expand our scope to the technology that powers eSports, we expose ourselves to casual gamers, self-driving cars (NVDA), memory chips (MU), and even drones (INTC). Semiconductor companies can give investors access to the potential upside of the eSports market, while providing a more diverse exposure than just retail or game production companies.

The Future of eSports

If you believed a sport was poised to experience an increase in popularity, you would look for opportunities to invest, whether in merchandise, infrastructure, manufacturing, or elsewhere. Unfortunately, traditional, well-established sports do not provide any obvious opportunities for aggressive or even moderate growth.

The eSports Industry, on the other hand, provides an interesting alternative. Over 20 universities in the U.S. and Canada have sanctioned varsity eSports teams in the past few years. NFL and NBA owners alike, including Jerry Jones, Mark Cuban, and Stan Kroenke, are expanding their portfolios to include eSports.

While impossible to determine the future of eSports, there seem to be more than a few opportunities for playing the game.

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Senior Consultant, Midwest IM Consulting
PJ joined FactSet in 2015 and is based in Chicago.

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