Investing in video games

Gaming has become a huge part of everyday life. I’ve always been a gamer. I spent way too many hours during my high school days locked up at home playing RPGs on my Sony Playstation. It was only in the recent decade, however, that gaming has stepped out of the shadows of basements into the mainstream.

The appeal of video games for me was the great value proposition they offer. I could spend $20 on a used video game as a kid and get hundreds of hours of entertainment. I simply couldn’t beat that outside of a long fantasy novel and that appeal of the $$ spent/hr of entertainment stuck with me as I got older.

The video game industry has always been good at adapting to the changing nature of tastes and product cycles and the various revenue opportunities that exist and could be harnessed.

The model started with a game you could buy for a $50 to something like an MMO that added a recurring monthly fee and an ever expanding world. All these games started to tap into the addictive nature of progression based gaming as publisher began to realize that they could get more than just the initial sales price and the user base was willing to pay for it to fund additional content.

The turning point was when the old model of selling physical copies morphed into digital copies with additional DLC(downloadable content) that could be purchased.

The proliferation of mobile devices thrust the world of video games into the mainstream and publishers began to realize the benefits of mobile games.

Just like digital, there was an ease of distribution as well as additional ways to monetize the massive user base that mobile games attracted.

Companies realized that a that small portion of users were willing to spend extra money to customize a character or get an advantage in the game. They took advantage of the ability to attract that type of gamer to improve profits.  Micro transactions, first used outside of mobile in limited scope, became a much bigger deal on mobile. These allowed developers and publishers to sell a variety of things like extra lives, power boosts or loot boxes containing items that users could use to customize their characters. The freemium gaming model(free game with in-game purchases) became massive on mobile as publishers wanted to capture as many people as possible in hopes of catching whales(gamers who would spend a ton of money to max out everything possible).

This model soon transitioned back onto PC and console games with an added focus on micro transactions and capturing more and more revenue from the whales that would spend extra money beyond the cost of the initial game to get everything the game had to offer.

Personally, this model doesn’t appeal to me and I never pay extra for a game and will avoid any game where you can buy an advantage but the financials don’t lie.

Video game companies have done very well in recent years and a lot of it is due to the new ways of monetizing their releases.

The truth is that there is always a need for escapism and video games provide one of the most effective ways to achieve that for the end user. The product captures the attention of users due to having a low(often free) cost of entry in relation to amount of entertainment produced leading to a high user base. That means there’s often(not always) a revenue boost for the company when a game first sells. On top of that, game designers have added a very addictive progression based flow to many games with the idea of monetizing a certain percentage of the user base in a big way leading to very high margins and repeating revenue on successful games.

That new foundation of monetizing games after released has meant that the global video game market has exploded in recent years. Almost $110B in revenue has been generated by video games in 2017 and that number is expected to grow at ~6% per year until 2020.

Newzoo_Global_Games_Market_Revenue_Growth_2016-2020_April_2017

One of the most visible trends that has driven this is the growth in Mobile based gaming. The mobile chunk of the pie started at 39% of $101B in 2016 and is projected to be 50% of nearly $130B in 2020. Continue reading “Investing in video games”

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Recent purchase – The Madison Square Garden Company(MSG)

Guys, I own a piece of the Knicks now!

I’ve always been a basketball fan and the recent purchases of NBA franchises at increasingly higher prices has led me to take a closer look this stock. There aren’t a ton of ways to invest in sports teams with only a few publicly traded companies offering investors an opportunity to do that and MSG is one of those.

My recent portfolio update showed me lagging behind on my mid-cap allocation and MSG fits that criteria with a market cap just above 5B. The stock has had a solid year and is up 24% YTD. I never looked at the stock before but the not so recent spin off of MSG Networks, the under performing cable assets the company used to own has made it an intriguing proposition.

MSG owns the Knicks but also owns a variety of other assets most notably the Rangers, the most valuable NHL team and the MSG arena.

Valuing an trophy asset such as a basketball team is very tricky. Forbes does an annual list of NBA valuations which has the Knicks listed at 3.3B for 2017 so that’s a good starting point but how does that valuation compare to the actual amount people are willing to pay to own such a unique luxury asset. The recent purchase of the Rockets at 2.2B gives me a good start pointing but it’s also worth looking at a few other recent NBA teams that have changed hands as well.  Continue reading “Recent purchase – The Madison Square Garden Company(MSG)”

Amazon’s taking over the world and the much talked about death of retail

Amazon’s purchase of Whole Foods Market was the headline this Friday and it sent a whole sector of retail into a tailspin as the thought of competing with Amazon had investors worried about the future of the grocery space.

It’s true that Amazon and online shopping in general has had quite an effect on retail as can be seen by the many store closures in the past two years. Companies like Sears, Macy’s, J.C. Penney and many others are closing hundreds of stores this year and will likely continue to do so in the next few years.

There are two reasons for this destruction in retail. The main reason is that more and more shopping has moved online. The e-commerce share of the overall pie has more than doubled in the past decade.

Do note that the number represented in the graph below includes certain things normally not bought online like gas, cars and the number excluding those items is nearer to 15% and continuing to grow.

ecommerce, online sales,e-commerce

Amazon has been the main beneficiary of this movement as evidenced by their stock performance and brick & mortar retailers have struggled to keep up. They’ve only recently started to invest heavily in the online sector but the moat that Amazon has built in that area may be hard to beat this late in the game. In fact Amazon makes up nearly half of the overall e-commerce which is impressive considering the # of online retailers that are out there.  Continue reading “Amazon’s taking over the world and the much talked about death of retail”

George Risk Industries Inc.(RSKIA) Stock Analysis

I’m always on the lookout for solid values but it takes a really solid value for me to pull the trigger and actually buy something.

I’m also a firm believer that research is the keystone of a good investment and I simply haven’t had time lately to get the research I want done on stocks that look interesting.

That’s one of the reasons why I only own three individual securities and keep most of my money in index funds and ETFs. It’s simply easier to buy ETFs when you have no time to research individual stocks.

Thankfully, I have gotten to a point where my work allows me ample time to do research on individual stocks and plan to start investing more in individual securities. This is the first of what I hope will be many articles that will discuss my analysis of a stock and my decision regarding a potential purchase.

If you’ve read my blog before, you know that my asset allocation plan has a 10% allocation to small-cap stocks so I’m willing to take additional risk in search for long-term results. All of my small-cap holdings are in mutual funds that spread the risk across a massive group of securities but that recenlty changed as I initiated a position in George Risk Industries Inc.

Let’s talk about George Risk.

Continue reading “George Risk Industries Inc.(RSKIA) Stock Analysis”

January dividend update

I can’t believe that it is February already and that I’m already writing the first dividend update of 2017.

Ferris sure was right when he said that life moves pretty fast because we’re already 1/12th of the way through 2017.

For those among us that are big fans of winter, Punxsutawney Phil saw his shadow which means we’re due for some more cold weather ahead. That’s not too great in my mind but it’s February already and we’re getting closer to Spring, one of my favorite seasons so I’m excited for the quick passage of time. The days are getting longer and it’s no longer pitch black when I leave work so that’s also a great bonus of putting January behind us.

December was an amazing month for dividends but we’re back to reality for January as I no longer own any individual dividend payers this month and the only cash coming in is my monthly payment from my bond mutual fund.

The cold weather means Steve, my trusty dividend employee who earned me a respectable $7000 last year had trouble finding work this month.

February will be similar story but we’re both certainly looking forward to March which has historically been a good month for me as a lot of my ETFs, individual holdings and mutual funds pay quarterly.

The market has continued to do well although pockets of value have begun to emerge as we wade into the depths of earning season.

I’m keeping a close eye on earnings and have seen some big moves in certain industries. Apparel companies were the talk of the last few weeks and have tanked recently after a bevy of mixed results. Companies like UnderArmour or HanesBrands dropped 15-25% after earnings announcements and there were others as well that were hit by the negative sentiment in that industry.

Massive drops like that are quite interesting because they show how quickly this market punishes bad performance. It’s certainly a stressful time to be an individual stock owner as companies can get a massive haircut by announcing poor earnings or guiding down for 2017.

I always feel like huge drops on solid companies are a good time to do some research. I’ve added a few companies to my list in the past few weeks to take a closer look. In the apparel sector specifically which has taken quite a pounding, I am looking forward to see how VFC does in the next few weeks as that’s one that’s getting closer to a really attractive valuation.

I’m eager to get started on the second full year of dividend tracking here and that all starts with January so let’s take a look at how my portfolio employee Steve did for me this month. Continue reading “January dividend update”

The case for Apple Part 1 – the iPhone

It’s always a good idea to keep an eye out on all of your investments including the big ones like Apple and the best way to do that is to look at the quarterly earnings that each company releases every few months. These will always give you a good indication on the past performance of the company, industry headwinds and future expectations.

Apple released their Q1 earnings a few days ago and as a long term holder of the stock, I figured it was as good a time as any to do an in-depth analysis of the stock and to see whether I’m still comfortable holding Apple or if it was a good time to sell.

I want to start with a quick run down of the numbers and projections but concentrate more on their product lines. Any weaknesses or strengths there will be instrumental in future earnings which is what I’m mainly concerned about as an investor. I realized this was going to be a long post when I started to get into the thick of things so I’ll probably split this into two or three posts. In this first one – we’ll do a quick run down of the earnings and the talk about their big money maker; the iPhone.

Q1 Earnings and Q2 Projections

The initial market reaction to Apple Q1 earnings has been unfavorable driven by weak Q2 forecasts, signs that iPhone growth is potentially nearing an end and weak computer and iPad sales.

First let’s take a look at the numbers.

  • Q1 EPS: $3.28 versus expectations of $3.23
  • Q1 revenue: $75.9 versus expectations of $76.6 billion
  • Gross margin: 40.1% versus expectations of 39.9%
  • iPhone unit sales: 74.8 versus expectations of 75 million
  • iPhone ASP: $690 versus expectations of $674
  • iPad unit sales: 16.12 million versus expectations of 17.3 million
  • Mac unit sales: 5.31 versus expectations of 5.8 million
  • Q2 revenue guidance: $50-$53 billion versus expectations of $55.7 billion

Let’s do a quick rundown of the earnings first.

I don’t want to bore anyone with too many numbers so I’ll try to keep this brief and to the point.

EPS grew 7% over last year. Apple has about 5% less shares outstanding now than they had at the end of Q1 2015. Adjusting for that, net Income y/y only went up about 2%.

Revenue grew about 2% as well. Apple’s iPhone was the only product that grew against Q1 2015 and it was a very small increase. The iMac sold 4% less units and iPad sales were down 25%. Services and other products grew by 19% and 43% respectively. Services now make up 8% of overall revenue while other products are about 6%. Not a huge chunk of the overall pie but the Mac line of business is only around 9% so these new areas are starting to add up a bit as they grow.

The 2% y/y increase against Q1’15 was driven by a big increase in India(76%), a large increase in Greater China(14%), a slight increase in Europe(4%) and decreases in the Americas and Japan.

The iPhone’s ASP(average selling price) actually went up this quarter as Apple raised prices in some foreign markets to offset currency headwinds.

Speaking of currency headwinds; since Apple does over 60% of their business overseas – the strong dollar has a pretty big impact on their revenue. Apple made sure to point that out during their presentation, a first for them showing a bit of concern about potential market reaction to the slowing growth. If you adjust for the currency differences between 2015 and 2016, y/y revenue growth would have been 8% instead of the 2%.

It’s certainly not a game changer but it does put the revenue picture into perspective as we’re seeing a 5B+ impact due to currency.

The problem is that this impact will likely continue in the near term so it can’t be discounted. Apple made a big deal out of it in this earnings release as it certainly hurt them but they certainly never adjusted for it in prior releases when the dollar was weaker and currency headwinds were a benefit.

We see these issues carrying through into Q2 revenue guidance which is short of expectations by a $2.7B on the high side and will be below Q2’15 which came in at $58B. Apple has also shown in the past that they tend to guide conservatively and I’m not surprised by the soft Q2 numbers here.

That’s it for the quick look at the earnings. I will come back to this later to put the product discussions into perspective against current and projected earnings. I’ll also touch on it again when I go through Apple’s statement of cash flows and balance sheets.

But first – let’s talk about the iPhone – their biggest source of revenue. Continue reading “The case for Apple Part 1 – the iPhone”