The rapid growth of esports
January 25, 2019

From Alan Gula:

For several hours, I was lost...

At first, I even struggled to move around.

I ducked into a building and found a shotgun lying on the floor. I picked it up and darted back outside.

I ran down the street frantically, on the lookout for any threats. Then, all of a sudden... bang, bang. And it was over.

This was my first experience playing the smash-hit video game Fortnite.

Now, before you get the wrong idea, let me explain...

I downloaded the game one weekend recently and began playing it in earnest. But even after a couple hours of play, my competitors were still slaughtering me with surprising speed and efficiency. I had yet to eliminate anyone else.

I played video games growing up, but I'm no gamer. And without practice, I'm no match for anyone skilled at Fortnite.

However, I wasn't playing to get good... or even for entertainment value.

Rather, I wanted to see for myself why the game had become so popular. Call it "boots on the ground" research into the booming business of esports.

The Fortnite phenomenon has spread like wildfire...

Video-game developer Epic Games released Fortnite in July 2017. Two months later, it released a second version called Fortnite: Battle Royale. In this version, the last surviving team or player wins the match – like a cartoonish Hunger Games-style battle to the death.

In less than a year, Fortnite amassed a total of 125 million registered players. It took social media network Facebook (FB) about five times as long to reach that number of monthly active users.

Fortnite runs on multiple video game platforms, including Microsoft's Xbox, Sony's PlayStation, Nintendo's Switch, and PCs. There are even iOS and Android versions, so you can play on smartphones and tablets.

Fortnite: Battle Royale is completely free to play... yet the franchise has reportedly generated more than $1 billion in revenue thanks to in-app purchases. The game generated nearly $320 million in revenue in May alone.

The game's meteoric rise is not only proving lucrative for Epic Games, though... It's also rewarding for the top players.

Some folks have begun to earn a handsome living livestreaming their conquests...

Tyler Blevins is a 27-year-old professional gamer who plays Fortnite under the screenname "Ninja."

Blevins makes more than $500,000 per month by streaming his Fortnite battles on Twitch, a livestreaming platform.

At any given moment, hundreds of thousands of people around the world are watching streams of Fortnite or other massively multiplayer online games like League of Legends. Last year, viewers tuned in to watch nearly 6 billion hours of cumulative content on Twitch.

With viewership like that, it's no wonder why e-commerce and cloud-computing giant Amazon (AMZN) bought Twitch in 2014 for $970 million.

So-called 'esports tournaments' are starting to draw huge audiences...

You probably heard the sad news... Last month, a shooting caused two fatalities at the Madden NFL 19 video-game tournament in Jacksonville, Florida. The tragic incident brought nationwide attention to the world of esports, a domain many people may have never heard of before.

Some people consider violent video games such as Fortnite to be a contributing factor to a rise in mass shootings. However, the U.S. is an outlier compared with other countries in terms of gun homicides per capita... And video games are a global phenomenon.

This much is clear: video games are big business. And esports – organized video-game competitions – are starting to attract more fans than many traditional sports.

For example, League of Legends, along with two other games, were featured at the Intel Extreme Masters World Championship last year. More than 173,000 live spectators attended the event, held in Katowice, Poland, over the course of two weekends. Another 46 million unique online viewers tuned in from around the world – a 35% increase over the prior year's tournament.

In fact, the 2017 finals of the Intel Extreme Masters was the largest esports event in history... But later that year, the semifinals round of the League of Legends World Championship surpassed it with an astounding 80 million unique viewers.

By comparison, research firm Nielsen reported a little more than 100 million average viewers for February's Super Bowl matchup between the Philadelphia Eagles and the New England Patriots. This year's NBA Finals drew 18 million average viewers, and the final round of the Masters brought in 13 million average viewers.

The traditional sports world has taken notice...

Like Fortnite, Overwatch is another popular online video game.

It's so popular that Overwatch's owner, video game developer Activision Blizzard (ATVI), created a 12-team professional Overwatch League in 2016.

Overwatch players earn a salary of at least $50,000 and receive health benefits. They're also eligible for significant performance bonuses, including a $1 million prize for the championship team.

Activision Blizzard reportedly required a $20 million buy-in fee from team owners, who include some big-time traditional sports executives.

For instance, Patriots owner Bob Kraft bought a team last year, as did New York Mets Chief Operating Officer Jeff Wilpon...

And last month, the Overwatch League Finals sold out the Barclays Center in Brooklyn, New York.

Of course, the average person doesn't have the skills required to become a professional gamer, nor does he know how to easily invest in video games.

But investors can make money from this trend...

Longtime Digest readers know that my colleague Steve Sjuggerud has been bullish on Chinese Internet conglomerate Tencent (TCEHY) for years.

Back in September 2016, he first told Digest readers about this "little-known company." Today, more and more investors are becoming aware of Tencent. Its market cap has risen from about $250 billion back then to around $400 billion today.

Tencent has long had its hand in the world of online games. Back in 2011, the company acquired a majority stake in Riot Games (League of Legends). The following year, it purchased a minority stake in Epic Games (Fortnite). And in 2016, Tencent bought a stake worth nearly 5% in Activision Blizzard.

Plus, Tencent has its own portfolio of games, including Fortnite competitor PlayerUnknown's Battlegrounds ("PUBG") and other mobile games for smartphones. For example, multiplayer online battle game Honor of Kings generated nearly $2 billion of revenue in China last year alone.

All told, Tencent's online games segment garnered about $16 billion in revenue over the past four quarters – nearly 40% of the company's total sales.

Gaming has long been a big part of Tencent's success. And this trend still has plenty of room to run. Gaming and esports market intelligence firm Newzoo estimates that the global games market will reach $180 billion in 2021... up from about $122 billion in 2017, or an increase of nearly 50% in just four years.

Unfortunately, Tencent's video game segment has run into some recent headwinds. Revenue shrunk 12% versus the prior quarter, even though it grew 6% year-over-year. The market was caught off-guard when the company posted its first quarterly decline in profits in more than a decade. Plus, Chinese regulators recently halted the sale of one of Tencent's games. The Chinese government has even outlined plans to limit the amount of time kids spend playing online games.

As a result, Tencent shares have pulled back, and we've stopped out of the position across some of our publications. But that doesn't change our long-term thesis that Tencent will become a household name one day soon... and potentially make investors a fortune along the way.

Chances are good that you've never considered investing in video-game developers...

Maybe you think video games are a frivolous waste of time...

But make no mistake, these companies have fabulous business models. You see, they're essentially software companies. And because the incremental cost to sell an additional software license is nil, software is a highly scalable, capital-efficient business. (As a result, these companies gush free cash flow, which is essentially the amount available to return to shareholders.)

Compare that with a car maker, for instance. For a company like Ford Motor (F), 50% growth in four years would be a monumental endeavor. It would have to build factories and equip them with complex production lines. All of this would require tremendous amounts of capital expenditures (or "capex"). Plus, the company would have to source massive quantities of materials like steel and glass.

Software makers, on the other hand, sell their intellectual property digitally. Therefore, they have low capex requirements.

Capital efficiency is one of the primary reasons we recommended software titan Microsoft (MSFT) in our flagship Stansberry's Investment Advisory newsletter back in 2012. We're sitting on a total return of around 280%. We also recommended Activision Blizzard for the same reasons back in 2011. We stopped out for a 128% gain in early 2016.

Stocks of some of the most popular video game developers have generated incredible returns over the past several years, making many of them too expensive for us to recommend in our newsletters today. But the video game market is still booming, thanks in large part to the emergence of esports. And when companies that capitalize on these growth trends go "on sale," be sure to take advantage of the opportunity... They can make for fantastic long-term investments.

But there is one way to profit from this trend that we consider a strong buy today...

Regular readers should be familiar with the recent research from my Stansberry Innovations Report colleagues, detailing the coming "5G revolution." In short, this new technology will enable us to send massive amounts of data across the Internet at speeds that are simply unimaginable to most folks today.

These lightning-fast networks will finally make breakthrough technologies like driverless cars, augmented and virtual reality, and the Internet of Things ("IoT") everyday realities.

They're also likely to dramatically accelerate the rising popularity of esports. You see, right now, you can play mobile versions of many of these games on smartphones and tablets. However, the full experience requires faster data speeds than what is currently available on today's mobile devices running on slower 4G networks.

But 5G will change this. Its dramatically improved bandwidth and speeds will finally enable cloud-based gaming for the first time... And it will allow you to play these games in real-time on virtually any device.

This is likely to create a "virtuous cycle" of rising esports popularity and growing demand for 5G networks.

This technology isn't here yet...

But it will be soon. The first 5G networks are expected to go live in several U.S. cities before the end of the year. And fully functional networks could arrive as early as mid-2019.

In other words, if you're interested in profiting from this trend, the time to act is now... before this story goes mainstream.

My colleagues at Stansberry Innovations Report have identified one company in particular that has already become the clear leader in the 5G revolution. And for a limited time, you can get immediate access to this premium research for 75% off its regular retail price. Click here for the details.

If you – or your kids or grandkids – have played Fortnite or any of the increasingly popular esports games, we'd love for you to share your experiences. Send your e-mails to feedback@stansberryresearch.com.

Regards,

Alan Gula

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