Are video games a worthwhile investment?

Video games aren’t what they used to be. An industry where the revenue stream ended at the storefront, dominated by kids and teens in basements has turned into a highly evolved, multifaceted and, in the mind of Evolve ETFs, investable industry.

Evolve launched their HERO ETF in June, a product designed to offer exposure to major gaming companies and the video game infrastructure around them. The product fits into Evolve’s belief in disruptive tech and the alpha drive tech stocks can deliver. It all started a year ago, when Raj Lala started to think differently about video games.

“I just didn't really see the investment case back then,” Lala, the President and CEO of Evolve ETFs said. “Probably because my kids are not gamers and I'm not really much of a gamer … but I started digging deeper into it and realized how different the revenue model is, versus even 10 years ago. That's where I started to get interested.”

Lala’s “aha” moment came when he saw an e-gaming tournament. Thousands of people filling a stadium to watch people play a video game. That was something he could never have imagined, and something that made him realize there’s a much, much, bigger market for gaming than the sale of a Nintendo cartridge.

He explained how sophisticated the revenue streams for gaming companies have become. Where the old model was one of instore or online sales, now many games are given away for free with in-app purchases, subscription fees, or downloadable content (DLC) integrated into the game. Companies are putting together professional tournaments, and broadcasters are bidding for media rights. The sheer number of gamers is staggering. Gaming market research Newzoo estimates that in 2019 there were 2.4 billion gamers, meaning people who play video games more than six hours a week, worldwide.

“It's not just kids,” Lala said. “It's people my age who are getting up on a Saturday morning and hopping onto their console to play NHL 2K with their friends. It's my mom playing Candy Crush on her phone.”       

Gaming, to Lala, was a perfect fit within Evolve’s wider strategy. He explained that they try to look for the ways the world will change in the next 10 or 20 years and invest in the forces either driving those changes or set up to benefit from them. That’s the approach that informs their cybersecurity ETF, their future of the automobile fund, and HERO.

Lala explained that in all their disruptive tech funds, Evolve tries to add diversity to a portfolio. Though Amazon owns the game-viewing platform Twitch, Lala won’t put Amazon in his fund because it’s likely already a part of most investors’ portfolios. He will include Take-Two Interactive, though, the gaming company behind such marquee titles as Grand Theft Auto, NBA 2K, and Civilization.

Lala accepts that gaming might not be the easiest sell for some advisors’ clients. Older clients who don’t game might still see the industry the way Lala himself used to. It’s up to advisors, he says, to bridge that gap and demonstrate what the revenue streams for these companies actually are.

“Often when we're talking to an advisor they’ll actually say, ‘I love that product, because I know how many charges are on my credit card every month from my kid doing these in-app purchases,’” Lala said. “Many advisors understand the revenue potential of these businesses. But I think it's important to fully understand the entire ecosystem of it.”

Lala is betting big on the future growth of the companies and industries that make up disruptive tech as a whole. He thinks some of the old traditional metrics need to be set aside when advisors evaluate companies, instead they need to look for future growth so they don’t miss out on tech’s big winners.

“There's a McKinsey study that came out a few weeks ago that actually said that there is going to be $90 trillion of added market capitalization to our equity markets over the next 10 years,” he said. “Half of that is going to come from disruptive technology. If you don't start adopting this inside of your investment portfolios, you're going to be missing out on a significant amount of the growth that's going to take place over the next 10 years.”