ASX-listed e-gaming stocks show promise but are they in the main event?

Tim Boreham

Independent Investment Research

Ever been invited to a party offering unlimited merriment – back in the times when such gatherings were legal of course - but instead turned up to one organised by the equivalent of an abstemious maiden aunt?

Investors in the fledgling e-gaming sector might well know the feeling. Globally, the industry is booming, with the pandemic only fuelling its growth as bored and/or lonely householders turned to such entertainment.

The ASX-listed offerings to date have not exactly been in the league of Sony, Atari, or Fortnite creator Epic Games But with the industry worth some $US250 ($330) billion globally, it’s not one to ignore.

In a potential sign of consolidation in the fledgling sector, mobile games developer and publisher iCandy Interactive (ASX: ICI) last month splurged $1.59 million on a 7.8 per cent stake of fellow games house Mighty Kingdom (ASX: MKL).

The latest ASX entrant, Mighty Kingdom listed in April, having raised $18 million at 30 cents apiece.

Sadly, the stock trades at half that value despite Mighty Kingdom releasing more than 50 games, in collaboration with the likes of Disney, Lego and Snapchat.

iCandy Interactive released Claw Stars in June and followed up this month with Masketeers: Idle has Fallen (which is not a Covid themed game, despite the title).

Animoca Brands demonstrated both the potential – and the disappointment – of the sector in July when it attracted a $US138.8 million funding injection, valuing the games developer at $US1.28 billion.

Animoca this week doubled up with a further $US65 million raising, which lifted the valuation to a cool $US2.2 billion.

The disappointment? The ASX delisted the company in March 2020, citing ongoing disclosure problems. Animoca now operates as an unlisted public company and is seeking another bourse to list on.

The new backers, including Samsung and Chinese billionaire Jack Ma evidently saw something in the company that had eluded public investors.

In its latest report on the Australian entertainment and media industry, PricewaterhouseCoopers (PWC) reckons the local e-gaming market was worth $3.41 billion last year and predicts it will turn over $4.9 billion in 2025 (a compound annual growth rate of 7.5 per cent between 2019 and 2025).

One-third of revenues are derived from microtransactions. This refers to gamers buying the paraphernalia to increase their scores, such as magic swords or racing cars.

The firm expects mobile gaming to be a “major contributor” to the segment as users switch to faster 5G networks.

Rather like an avid egamer, the companies tackle the market with varying tactics and with various degrees of success.

Animoca co-founder and executive chairman Yat Siu sees the future in non-fungible tokens, or NFTs. For the uninitiated – anyone over 40 that is - NFTs are digital coins that confer verified ownership of an asset such as artwork.

There’s been a boom in NFT-based monetisation, with crazy prices paid for ‘artwork’ such as cartoon penguins in sunglasses, or Twitter founder Jack Dorsey’s first tweet which fetched more than $US2.9 million (it was autographed, mind you).

In the gaming sphere, the NFTs relate to the aforementioned paraphernalia.

Yat says: “Why would users want to pay for something that they will never actually own and which can be taken away in an instant when a game publisher decides to shut down the game or alter the terms of service?”

For Emerge Gaming (ASX: EM1), its fortunes lie with the mobile gaming market, which was worth $US90 billion globally.

The company cites 2.7 billion mobile gamers – about twice the population of China. But more than 90 per cent of them are starved of high quality engaging content because of large downloads, high costs or additional hardware requirements.

Still, Emerge Gaming describes 2021 as a “literal game changer” – and we’ll pay that one. Emerge clocked up revenue of just over $10 million and managed a $516,000 net profit.

Emerge is valued at $38 million, with cash on hand of $15.8 million.

As its name suggests, Esports Mogul (ASX: ESH) hosts tournaments on behalf of corporate customers.

For example, in the US the company facilitated a competition for Kellogg, by which an event with $US25,000 of prize money was advertised on cornflake packets.

Esports Mogul generated revenue of $153,300 last year and lost $2.7 million.

Esports is also the platform provider for a Walmart even in Arkansas called the Rewired Festival, an “immersive esports and technical” event designed to inspire young minds to pursue the arts and sciences.

In contrast to the joy of destroying a nexus* in a prolonged League of Legends game, ASX egaming hasn’t been much fun for investors.

The unlisted Anomica aside, the best we can do is Playside Studios (ASX: PLY) which was listed in mid-December at 20c share and at last glance they traded at 72c, having spurted up 40 per cent in the last week after encouraging quarterly revenue numbers.

Playside last month teamed up with the UK listed video game publisher Team17 Group to promote its first PC title, Age of Darkness.

Under the deal, Team17 contributes $2.4 million over nine months, in exchange for publishing rights across current and future platforms.

Playside has seven new titles in advanced development, including the mobile puzzle Legally Blonde and a Godfather-themed combat game.

According to broker Canaccord, these games offer a potential for revenue uptick as “they combine recognisable franchises with the strength of Playside’s development competencies.”

As with Mighty Kingdom’s stock, Emerge Gaming and Esports Mogul shares have also roughly halved over the last year: the latter is valued at less than a cent and worth $13 million, not much more than its $5.7 million of cash.

According to the PWC report, gaming is now worth more than value of the traditional book or TV industries.

As with sitcoms and potboilers, for every Candy Crush or Fortnite blockbusters there are many more titles that will sink into obscurity.

For a meaningful exposure, investors will need to broaden their horizons with the likes of the Hong Kong listed Tencent, owner of League of Legends developer Riot Games.

With Tencent worth a cool $830 billion – that’s right, billion - investors will know they’re really playing with the big boys.

*Enemy base

Tim Boreham edits The New Criterion

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Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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