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The Future Of Gaming Is Not In New Consoles

December 15, 2020 10:16 am
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The Future Of Gaming Is Not In New Consoles

Historically, new product launches have been the sun around which the gaming industry operates. 

Take the last console cycle in 2013. Launched days before Black Friday, Microsoft Corporation’s (NASDAQ:MSFT) Xbox One and Sony Corp’s (NYSE:SNE) PlayStation 4 combined to sell over 4 million units in the first three and a half weeks—a nearly $2 billion record haul1.

And though demand is through the roof this time around, the story of the Xbox Series X and PlayStation 5 launches has instead been one of limited supply. 

Strong pre-order sales and supply chain bottlenecks—both a direct result of the pandemic—has resulted in massive shortages that have left retailers and manufacturers unable to keep up with demand

As Wedbush analyst Michael Pachter noted, GameStop (NYSE:GME) was the only retailer that even promised to have in-store inventory of the PlayStation 5 and Xbox Series X Black Friday—and they only promised to have at least two of each. Such a development would have been unheard of in prior cycles. 

This constraint, combined with the fact that there are very few new games available for each console, has some wondering if buying the latest editions is even worth it. That refrain is familiar, according to JP Lee, product manager at VanEck. 

“This happens every console launch. The console comes out and then people are trying to figure out ‘Why should I buy a PlayStation if there are only three new games? Why should I buy an Xbox when there are not any Xbox exclusives on launch day?’ I do not believe [the first few weeks] will make or break these consoles, whether it's PlayStation or Xbox. The demand is already there.” 

Not that investors need any convincing. Fueled by stay-at-home orders, the gaming and eSports trade has been among the hottest of the year. 

The VanEck Vectors Video Gaming and eSports ETF (NYSE: ESPO), which offers exposure to video gaming and esports stocks, is up 77% year-to-date2, as of December 14. The fund has also taken in $445 million in inflows this year3 (for comparison’s sake, the Wedbush ETFMG Video Game Tech ETF (NYSE: GAMR) is up 68% year-to-date as of December 144 and has taken in $9 million of inflows5). 

screen_shot_2020-12-14_at_4.57.53_pm.png
ESPO 2020 performance; Source: Benzinga Pro; Data as of December 14. 

screen_shot_2020-12-14_at_5.57.10_pm.png

It’s Not About The Consoles—It’s About The Platforms

Even with current supply shortages, expectations for console sales are high across the board. 

Sony Chief Financial Officer Hiroki Totoki reportedly told analysts in October that he expects to sell 7.6 million PS5 units by April.

But Lee cautions not to get hung up on sales figures from the latest consoles. Instead, investors should be watching how these manufacturers use their latest consoles and exclusive intellectual property to grow their online platforms. 

“Companies are trying to become less dependent on these tentpole launches,” he said. “By the end of this newest console cycle, it will be all about the platform.”

He pointed to Microsoft’s recent $7.5 billion acquisition of ZeniMax Media

“That to me is a huge plus in Microsoft's case, because now they own Elder Scrolls, Fallout, Quake and Doom. If Microsoft owns all this IP and if they actually make it Xbox exclusive, that's a large incentive for consumers to go with Microsoft. You would then expect PlayStation to try and mimic that in other ways, buying another development studio and owning other IP that they're going to have PlayStation exclusives for.”

According to Lee, this focus on platforms will be one of the major drivers of the gaming industry for the next decade. 

“Ten to 15 years down the line, we will be talking about cloud gaming in the same way we talk about mobile, today.”

1Source: https://www.cnbc.com/2013/12/11/xbox-one-playstation-4-sales-total-18b-first-three-weeks.html
2Source: Benzinga data
3Source: ETFdb.com 
4Source: Benzinga data
5Source: ETFdb.com
 

Important Disclosures: 

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

An investment in the Fund may be subject to risks which include, among others, investing in the video gaming and esports companies, software, internet software & services and semiconductor industries, equity securities, communication services and information technology sectors, small- and medium-capitalization companies, issuer-specific changes, special risk considerations of investing in Asian, Japanese and emerging markets issuers, foreign securities, foreign currency, depositary receipts,  market, operational, cash transactions, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small- and medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus , which contains this and other information, call 800.826.2333 or visit  vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing

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