For public video game makers, 2018 was the worst of times. Industry executives were blindsided by “Fortnite,” a free-to-play phenomenon from Epic Games.
Electronic Arts saw its shares get cut in half from their 2018 highs, although those have rebounded this year.
It’s important to remember that, beneath all the mystery in the mainstream about games and gaming culture, the industry functions much like the Hollywood studio system.
Like feature films, games are pitched and financed. They are meticulously produced and promoted. The goal is to create engrossing narratives and lasting franchises.
“Madden Football,” an EA Sports game that mirrors the NFL, debuted in 1988. It’s now a vibrant ecosystem. It even spawned a professional gaming league, where eSport athletes compete for six-figure prize money.
Wall Street analysts think “Fortnite” has the potential to be bigger. Set in a post-apocalyptic world, the cross-platform battle royale has players band together in groups of four to rebuild the homeland with elaborate forts.
They fend off monsters with exotic imaginary weapons, that players buy while the game is underway. The $2.4 billion the company raked in during 2018 via these virtual trinket sales made “Fortnite” the top free-to-play game by revenue.
According to a Business Insider story, registered players topped 200 million in December 2018, up from 75 million members in June. And 60% of players were in the key 18- to 24-year-old demographic.
They move on. And there are some signs of “Fortnite” fatigue.
Epic Games staged an in-game concert earlier in February with Marshmello, a popular electronic music DJ. Last week, Variety reported the company plans to offer $100 million competitive prize pool money during 2019.
These moves come against the backdrop of escalating competition.
Electronic Arts released “Apex Legends” on Feb. 4. Only three days later, this free-to-play battle royale reached 10 million players. By the end of the first week, the number of players jumped to 25 million.
I’m not claiming “Apex Legends” will be the next “Fortnite.” As fast as the franchise has grown, it is still a newcomer.
The more compelling story is about sentiment …
Electronic Arts is especially attractive because it owns Apex Legends.
Gaming is a great business. The industry grew 10% to $116 billion in sales during 2018.
That was more than TV ($105 billion), Film Box Office ($41 billion) and Digital Music ($17 billion).
Electronic Arts shares trade at 24x forward earnings. The market capitalization is $28.7 billion.
The company is the second-largest gaming franchise in the world. The opportunity for investors is that video game stocks will likely return to favor.
Given the industry is the fastest growing media segment, it is a good bet. My target is $200 by the end of 2022.