After several months of delay, Amazon Games has finally launched New World, its brand-new RPG game. Many of Amazon’s other gaming projects were cancelled before they ever saw the light of day, including a Lord of the Rings themed game.
Given the disappointments, why should games matter to Amazon stock (AMZN) - Get Free Report investors? The answer lies not in past failures, but in the potential for future successes. The pandemic has made games larger than the movie industry and North America sports combined. Armed with the right tools (e.g. cash to invest, cloud infrastructure and a platform like Twitch), Amazon can become a key player in the space — and many might not even be aware of the opportunity yet.
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Why Amazon is such an important player
The game industry is expected to grow to $314 billion in 2026 from $173 billion in 2020, for a CAGR of nearly 10%. The secret sauce to this growth is cloud gaming. Not unlike the movie streaming revolution led by Netflix (NFLX) - Get Free Report, gaming-as-a-service is expected to transform the way videogames are distributed and consumed – but this cannot be done without access to massive cloud infrastructure. Luckily for Amazon, the company has its own.
While most game companies rely on third party cloud platforms, Amazon could leverage AWS (Amazon Web Services) to lead the disruption in game distribution. Amazon’s strategic position could help with margins as well, since the e-commerce titan would not need to pay a tech peer to host content.
The final piece of the puzzle is Twitch, a popular platform used by streamers to engage gamers and monetize e-sports content. Amazon acquired Twitch in 2014 for nearly $1 billion in cash, an investment that could prove valuable now.
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Microsoft has Amazon on the radar
When you think of games, do you think Amazon? Probably not. But at least one heavyweight in the space, Amazon’s own neighbor in the Pacific northwest of the United States, does.
Phil Spencer, Microsoft’s (MSFT) - Get Free Report head of gaming and Xbox, believes that Sony and Nintendo would probably not build cloud infrastructure from scratch. In a Protocol interview, Mr. Spencer revealed that he sees Amazon and Google as Microsoft’s main competitors in the future.
“When you talk about Nintendo and Sony, we have a ton of respect for them, but we see Amazon and Google as the main competitors going forward. I don’t want to be in a fight over format wars with those guys while Amazon and Google are focusing on how to get gaming to 7 billion people around the world. Ultimately, that’s the goal.”
A hidden opportunity
According to Bloomberg, Amazon spends nearly $500 million in game development, and yet the company hasn’t delivered a single hit. Lack of big news coming out of Amazon’s game sub-segment may explain why few analysts consider Amazon Games a pillar of the investment thesis. Yet, this could very well be an opportunity, and an underappreciated one.
When buying AMZN stock, we think that investors are still paying primarily for an e-commerce and cloud business. But they are also taking home — maybe for free — the possibility of Amazon becoming one of the world’s leaders in game development and distribution.
With access to plenty of cash to invest, in-house cloud infrastructure and a platform like Twitch, do you think that Amazon can become a major player in the gaming industry?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)