This has been a crazy year for stocks, to say the least.
The rotation and sector-concentrated movements have been the most influential I have seen over the past two decades. And, just because we flip the calendar from 2020 to 2021, don't expect that to change.
So for investors, this means it's game on -- literally. Here, we're going to dive into the gaming sector. This follows up on my top stock picks last year. While I didn't focus exclusively on gaming then, my 2020 names to own came from the group: Huya (HUYA) - Get Report, BiliBili (BILI) - Get Report, and Sea (SE) - Get Report.
The trifecta didn't do all that poorly, either. SE is up 412% year-to-date, BILI is up 304%, and HUYA only 8.9%. Sadly, it was HUYA I expected to be the top of the three. This is a good reminder of why we look at multiple names in a sector and spread our bets. If you balanced out with all three or even went top-heavy with HUYA, you'd still be happy. If you only went HUYA while watching the other two triple or quadruple, you would not very happy.
That said, I'm not repeating those three picks.
Rather, here's what I'm looking at, in no particular order:
- Activision Blizzard (ATVI) - Get Report
- Turtle Beach HEAR
- Skillz via Flying Eagle Acquisition (FEAC) - Get Report
- Super League Gaming (SLGG) - Get Report
- Roblox (pending IPO)
- Roundhill Bitkraft Esports (NERD) - Get Report -- For those wanting to go broad and minimize single stock risk.
Activision Blizzard: This developer and publisher of entertainment software aren't flying under anyone's radar. I'd say ATVI is the obvious pick and one of the more conservative ones, too. The company just published the fastest-selling PC game to date, "World of Warcraft" (WoW). The 3.7 million-plus units on the first day eclipsed the previous record held by the game "Diablo," which is also published by Activision. The company boasts those two, along with other blockbusters like "Call of Duty," "Overwatch," and "Hearthstone." There's no reliance on a single name here.
In its most recent third-quarter report, the company surpassed both revenue and earnings per share expectations with $0.71 per share on $1.77 billion in revenue. The fourth quarter is expected to slightly surpass expectations, but with the strength of "WoW" and console upgrade cycle, Q4 numbers and the first half of next year could continue the strong growth trend.
Additionally, the online gaming service, Battle.net, will help ATVI continue to expand more deeply into eSports. Expect that to be a major catalyst for the company and it should cement "WoW," "Overwatch," "Hearthstone," and "Starcraft" deeper into the gamer community.
Turtle Beach: This gaming-accessories provider has already doubled this year, driven by strong sales of headsets, PC mice, and keyboards. While the work-from-home trend kicked HEAR into high gear, the momentum has stayed with the company. In the third quarter, the company earned $1.04 per share vs. a $0.19 estimate. Revenue of $112.5 million trounced the $84.3 million estimate.
That was a growth rate of 141% year-over-year.
With $27 million in cash and no debt, HEAR boasts a strong balance sheet. And with the next-generation Xbox and Playstation hitting the markets, the company now has the two top-selling wireless headsets in the world. Given you can't even find a PS5 now if you want to, this could be a huge catalyst for quarters to come.
Skillz: Skillz is going public through a reverse merger with special purpose acquisition company FEAC. (A reverse merger usually involves having a publicly traded shell company buy a private company and allowing the private company's shareholders to trade their shares for a majority of the shell company's publicly traded shares, gaining control and voting rights.)
The company offers a proprietary gaming ecosystem, bringing together both players and developers. Its users average 62 minutes per day on the platform. That's longer than TikTok, Facebook (FB) - Get Report, YouTube (GOOGL) - Get Report, or Snap (SNAP) - Get Report.
The platform includes tournaments, leagues, player ratings and matching, loyalty rewards, payments, social features, anti-cheat, and 24/7 customer service. By opening the platform to developers, Skillz created a self-sustaining platform. Developer created content and more content draws more gamers, so developers create more content. More gamers equal more revenue for developers and more content equals more choices for gamers.
Management anticipates revenue of $225 million in 2020, representing 88% growth. That is expected to more than double to $555 million by 2022. If the company can capture only 1.5% of the iOS market opportunity, it should generate $8 billion in revenue annually in the future. For now, the total addressable market sits around $165 billion with $68 billion realistically in play. Skillz offers tournaments and contests from which it receives a 14% revenue take of entry fees. Already it has 34 games on its platform with over $1 million annualized GMV. Management expects the company to be positive by 2022 for earnings before interest, taxes, depreciation, and amortization.
Super League Gaming: This gaming community and the content platform is by far the smallest and most aggressive name on this list. It has only a $33 million market cap, and roughly one-third of that is cash on the balance sheet. It's tiny. Big risk, but big potential. The company is making a strong shift into eSports, with its "Super League Arena." Amateur eSports players compete for cash, scholarships, and prizes in a monthly tournament series. This includes games like "Fortnite," "Apex Legends," "Rocket League," "Madden," "CS:GO," and more.
SLGG plans to draw more spectators into the action by using its patented and scalable cloud-based camera character technology. It essentially allows placement of virtual cameras into video games.
Revenue of $718,000 remains on the small side, but that's up 105%. Registered users climbed 144% to 2.4 million while engagement hours rose 218% to 47.7 million. The company will need to concentrate on growing these names to grow revenue. Fortunately, they have the cash to do so.
Roblox: A global platform where people imagine, create, and share in an immersive, user-generated 3D world. The company calls itself an "Imagination Platform."
I have to put an asterisk by this pick since it hasn't gone public yet. If you can get an allocation, I believe you should do it. This looks like a "sure-thing" IPO. I put that in quotes because there are no sure things in the market, but this has a high probability for a huge first-day pop. Roblox users have surged over 80% during the pandemic, gaining huge popularity in the teen and pre-teen crowd. Hour usage for 2020 is in the tens of billions. Its user base has surpassed 31 million.
The company is still in a grow-first mode, so it's losing money, but revenue should approach a billion dollars next year. This could be a tough one to chase on day one, so investors may need to be patient, but I'm sure there will be a pullback entry possibility in 2021 for Roblox.
Roundhill Bitkraft Esports: If you don't want to overthink it, then go with the top-tier exchange-traded fund in the gaming space: NERD. I've written about this one before. The management of the fund is solid. It gives broad exposure to the entire industry from sub-sectors to countries to size. It avoids concentration without over management. That said, the managers are actively following a set of investment guidelines. If you don't want the hassle of managing individual names, then this is the place to be. Even with individual names, I would still include an allocation to this ETF.
And there you have it. The five-plus one names on my list in gaming for 2021.
Tim Collins is a regular contributor to Real Money, TheStreet’s Premium site and provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Mark Sebastian, Paul Price, Doug Kass, and others.
At the time of publication, Collins was long NERD.