Could EU esports funding boost shares in EA, Nintendo and Tencent?

The Electronic Arts, Nintendo and Tencent share prices were lifted by the pandemic gaming boom as millions found themselves locked down and looking for fun ways to pass the time. More and more people are now streaming themselves playing games or entering esport tournaments.

- The EU has passed a vote to recognise and fund esports

- The industry could generate $204.6bn in 2023, up from $175.8m in 2021

- EA is the biggest holding in the Global X Video Games and Esports ETF

Share prices for Electronic Arts (EA) [EA], Nintendo [7974.T] and Tencent [0700.HK] could benefit from European Union (EU) recognition of the gaming and esports industry.

Earlier this month, the EU settled a long-standing debate when it passed a vote to recognise and fund esports and gaming. A big question that has been facing the industry for years is whether it should be recognised in its own right or classified as a sport. The bloc will work together to promote esports as part of a digital European identity and to develop a framework for regulating the industry, including employment issues related to professional esports’ players.

While the EU’s decision wont impact EA, Nintendo and Tencent directly, its a clear positive sign for the gaming and esports industry, and will potentially inspire greater uptake at an amateur level.

The EA share price is up 2.8% in the past month. The Nintendo and Tencent share prices are down 1.7% and up 19.2% in the same period, respectively.

Mixed demand for subscriptions and live services

EAs sports titles were its biggest revenue driver in the second quarter of 2023, which ended 30 September. In particular, its live services, like its FIFA Ultimate Team, accounted for 73% of the companys business in the quarter. FIFA net bookings were up 6% year-over-year in constant currency.

While Nintendo made most of revenue from hardware sales in its first half of 2023, digital revenue, which includes add-on content and Nintendo Switch Online memberships, was up 30.2% year-over-year in the six months to the end of September to 187.8bn yen. Total revenue for the first half was 656.9bn yen.

At Tencent, Q3 2022 domestic gaming revenue dropped 7% from the year-ago quarter to 31.2bn Chinese yuan, but international gaming rose by 3% to 11.7bn yuan. Value-added services subscription revenue fell 3% to 299m yuan. Tencent shut down Penguin Esports, its livestreaming rival to Amazons [AMZN] Twitch, in April.

Esports a long-term trend beyond near-term headwinds

According to research by VanEck, the esports industry could generate $204.6bn in 2023, up from $175.8m in 2021 and $177.8m in 2020.

We believe the growth of video gaming and esports is a trend, not a fad. It reflects broader movements around the increasing consumer demand for online, interactive entertainment, the fragmentation of the digital media landscape amid the rise of cord-cutters, and the demographic shift, as digital natives get older,” wrote the VanEck analysts.

Games companies may have to battle headwinds in the near term, however. There are big questions remaining over how recession-proof the gaming industry might prove to be and whether subscriptions and live services, such as EAs FIFA Ultimate Team, are a discretionary item that consumers will continue to pay for in tougher times. Investors will likely be keeping a close eye on upcoming earnings for any signs of a market slump.

Research by Alliance Bernstein seen by Barrons indicates that EA is trading almost 17 times below its expected earnings per share for 2023.

Funds in focus: VanEck Video Gaming and Esports ETF

The VanEck Video Gaming and Esports ETF [EPSO] currently has Tencent as its second-biggest holding, with a weighting of 9.27% as of 21 November. Nintendo and EA are fifth and seventh respectively and have been allocated 6.43% and 5.28% of the portfolio. The fund is up 7.6% in the past month, but down 35.5% year-to-date.

Nintendo is the eighth-biggest holding of the Wedbush ETFMG Video Game Tech ETF [GAMR] as of 22 November, with a weighting of 2.48%. The fund, which holds EA at 2.44% and Tencent at 0.77%, is down 38.5% year-to-date, but is up 6.65% in the past month.

As of 21 November, EA is the biggest holding in the Global X Video Games and Esports ETF [HERO] with a weighting of 7.01%, while Nintendo is third with a weighting of 6.27%. The fund is down 35.75% year-to-date, but up 3.2% in the past month.

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