How to Invest in Esports — Digging Down into the NERD Index

by Roundhill Team / June 20, 2019

Digging Down into the NERD Index
Source: Red Bull

For most people, the concept of esports may be foreign. It seems strange that people would rather watch someone playing a game than actually play it themselves. However, for the current generation of children and young adults, spectating video games has become a notably popular activity, one that could challenge the landscape of traditional sports and entertainment. Esports as a form of entertainment has quite rapidly moved from the fringe to the mainstream - in 2018, the game ‘League of Legends’ was able to draw 100 million viewers1 for a single tournament. The marketing potential associated with these eyeballs has not been lost on numerous non-endemic sponsors like Coca-Cola, Toyota, T-Mobile, and many more.

Esports Audience Growth
Source: Newzoo

The ‘League of Legends’ tournament viewership is just one example of the size of the opportunity set. On a global basis, Newzoo estimates that there are 173 million frequent viewers of esports and an additional 222 million occasional viewers today. By 2022, Newzoo expects the esports total audience to reach 645 million, roughly double the entire population of the United States. These figures may suggest esports has already become a mainstream form of entertainment, though the industry is still seeking more effective audience monetization channels. Uncovering these monetization channels is likely a key factor in industry revenue and profitability going forward.

The Esports Observer
Source: The Esports Observer

Here at Roundhill, we are trying to bring esports to the investing public. Below is an introduction to 7 of the 25 public companies that comprise the Roundhill BITKRAFT Esports Index, or simply, NERD:

Related: Thematic Investing 2.0 - Why is it important?

Roundhill Investments
Source: Roundhill Investments

Game Developers

Game developers are the source of content in the esports ecosystem. They not only need to create games that cater to the tastes of vast audiences across different ages, but also plan ahead about games’ sustainability to prevent cannibalization. We believe investing in developers is central to any strategy to invest in esports because of the importance of intellectual property owners to the ecosystem.

Electronic Arts (EA)

Electronic Arts (EA) logo

Over the past few years, the “last-man standing” genre of multiplayer games known as “Battle Royale” has taken the esports scene by storm. It started with H1ZI and PUBG in 2017, and then exploded in 2018 with the proliferation of Fortnite. For a period of nearly two years – a lifetime in the hit-driven business of gaming – Fortnite remained unchallenged atop the gaming world. Fast forward to February 2019, when Respawn Entertainment, a game developer owned by Electronic Arts, surprised the gaming world with the launch of a true competitor to Fortnite, Apex Legends. While the polished game mechanics and aesthetics of Apex were to be expected from a AAA publisher such as EA, the game itself was unexpected, as EA “surprise launched” the title as a free-to-play game on its Origin gaming platform. Opting to focus on paying popular streamers to promote the game in lieu of traditional marketing strategies, the game surged in popularity. Apex outgrew Fortnite in its first few months, crossing the 50 million registered user mark in 28 days (Fortnite took about 4 months).

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In addition to their new blockbuster, Apex Legends, Electronic Arts publishes many popular esports titles, including sports simulation franchises FIFA, NHL and Madden. For fiscal year 2019, EA reported revenue of $4.95 billion, and provided guidance for full-year 2020 revenues of $5.375 billion. As of May 31, EA traded at an Enterprise Value of $23.2 billion, or 4.3 times fiscal 2020 revenue guidance.2

Related:Battle Royale: Fad or Future?

Activision Blizzard (ATVI)

Activision Blizzard (ATVI)

Activision Blizzard is arguably the most well-known game developer and publisher on the planet, with a portfolio of game titles ranging from World of Warcraft to Candy Crush and everything in between. While many ATVI titles have established themselves within the worlds of game streaming and esports, two titles, both with upstart professional leagues are worth keeping a particularly close eye on – Overwatch and Call of Duty.

Overwatch League, or OWL, is the first professional esports league to adopt a city-based, franchise model – a model very similar to that of traditional sports. The concept of a city-based model is rather straightforward. Put simply, it means that teams are assigned a home location and presumably will develop a fan-base as per that geography. In New York, we have the New York Excelsior (Wilpon Family); in Boston, it’s the Boston Uprising (Kraft Family). For the 2019 season, the Overwatch league supports an ecosystem of 20 teams including 15 in North America, 3 in Asia, and 2 in Europe, highlighting the truly global reach and scale of esports (a la basketball or soccer). While all teams are playing home and away games in Burbank, CA for the 2019 season, the OWL will introduce proper “home games” beginning in 2020, where local fans will head to their local arenas to support their teams and superstars (sound familiar 😉?). As to be expected, investment into arenas has been significant, with the Philadelphia Fusion recently announcing the development of a brand new $50 million stadium .

Overwatch League Team Map Visualization

The franchise model should sound familiar, too. In the Overwatch League, team owners pay for a spot in the league, similar to the NFL and NBA. (This differs from the promotion and relegation model popularized by European football.) While the most recent expansion teams, Houston Texans and Charlotte Bobcats, paid $700 and $300 million for their place in the NFL and NBA, ATVI sold franchises for $20 million for its inaugural season. This past year, fees increased to $30-60 million7.

While details for the Call of Duty World League (CWL) are yet to be finalized, ATVI confirmed in April that it would replicate OWL’s city-based franchise model. Franchise fees are reportedly in the $25 million range, while the following cities and ownership groups are on board:

Bloomberg table
Source: Bloomberg

ATVI is a pioneer within the realm of professional esports amongst its peers, having purchased Major League Gaming (MLG) in 2016 and Blizzard Entertainment, the developer for StarCraft, World of Warcraft, Hearthstone, and Diablo in 2013.

Streaming Platforms

When investing in esports, it’s important to consider the entire ecosystem and not just the game developers. People who watch esports also play a significant part in the industry. As such, by investing in streaming platforms, one also invests in esports without making a bet on the success of the individual games.

Huya (HUYA)

Huya Logo

If you are familiar with the gaming industry, you’ve probably heard of Twitch. Twitch is a video game streaming platform that was acquired by Amazon for $970 million in 2014 . It is one of the premier streaming platforms for esports and video games globally - except in China, where it is banned. As a result, Chinese interested in live-streaming gaming content, of which there are 149 million individuals in 2019 (as defined by Newzoo’s “total esports audience”), are forced to look elsewhere. This has led to the development of localized streaming platforms, of which Huya and Douyu are the most prominent. Huya is listed in NYSE while Douyu recently filed for its IPO. Other platforms include YY and Bilibili, both of which offer more diversified content and target a different user base.

Average MAU chart

Huya has made significant progress lately in terms of revenue and user growth (measured in MAU or “monthly active users”). Huya has raised a significant amount of capital to jumpstart its growth, including a massive funding round led by gaming giant Tencent in March of 2018 ($460 million10), followed by the capital infusions from its IPO on the NYSE ($207 million11) and its secondary offering ($442 million). For the first quarter of 2019, HUYA reported a year-over-year increase of 82.2% in revenues (in USD terms). For reference, Huya generated revenues of $705 million for full year 2018.12

HUYA MAU chart

Over the course of 2018, HUYA’s average mobile monthly active users increased by 30.7%, while the average monthly active users increased by 34.5%. Importantly, the total number of paying users also increased substantially - between the fourth quarters of 2017 and 2018, the number of paying users increased by 73.1% reaching 4.8 million13.

Hardware / Peripherals

Just as characters in RPGs (Role Playing Games) look for shiny armors and upgrades, heroes in real life also want fancy headsets and keyboards. Choosing the most trendy and comfortable hardware has become ingrained into the lifestyle of many generation Z players. To truly invest in esports, one must consider the opportunities presented by this important part of the ecosystem. And who wouldn’t want to hear the footsteps clearer and identify the impending threat easier in Fortnite

Razer (1337.HK)

Razer logo

Golfers invest in golf clubs to improve their game. Gamers are no different. But instead of wedges, irons and drivers, video gamers are looking to up their play by purchasing state-of-the-art peripherals, including keyboards, mice, and headsets. Razer is a leading gaming lifestyle brand, sporting the tagline “for gamers, by gamers”. As gaming becomes more competitive and increasingly popular, hardware (i.e. “the picks and shovels of video gaming”) will likely see increased demand. In 2018, Razer had a year-over-year net revenue growth of 37.6% and a year-over-year increase in net revenue from hardware of 29.4% . Companies like Razer are well positioned to thrive as the esports ecosystem matures.

Razer IR chart
Source: Razer IR

Razer is also what is known as an endemic sponsor in esports, acting as the hardware partner for many of the top teams, including Immortal, Gen.G and Evil Geniuses. The Hong-Kong listed company is also the proud owner of the most “pog” ticker symbol in the game, 1337. In gamer speak, “1337” means “leet” or elite. The more you know…

Turtle Beach (HEAR)

Turtle Beach logo

While Razer offers diversified exposure to the gaming hardware sector, Turtle Beach, traded as HEAR on the NASDAQ, is more of a pure-play. Until as recently as March, when HEAR announced the acquisition of Roccat, a German producer of high-end mice and keyboard, HEAR had only one focus: gaming headsets.

For a company with one product line, it’s fair to expect some volatility. That’s exactly what we saw in 2018 for Turtle Beach as demand for gaming headsets skyrocketed. From a logical perspective, this makes sense. The “Fortnite Effect”, or “Battle Royale Impact”, lead to increases in net revenue and adjusted EBITDA of 93% and 399% respectively15.

Turtle Beach chart
Source: Turtle Beach IR

However, investors remain skeptical of Turtle Beach’s ability to sustain its growth and replicate 2018 successes. As of May 31, HEAR traded at a relatively modest estimated EV/EBITDA multiple of 3.9 times 16.

Events / Tournaments

In-person events are important in that they bring gamers from around the globe together to celebrate their passion and support their teams. You might wonder, “don’t gamers prefer to stay at home?” That is a big no-no. We can speak from experience, having attended esports events, that the excitement surrounding these events is real. We believe that investing in the companies behind these events is an important piece of investing in esports.

Modern Times Group (MTGB SS)

MTG logo

For basketball, there is the NBA; for hockey, there is the NHL; for football, there is the NFL. Each sport has a primary professional league in which the world’s best athletes compete. For esports, it is a bit more complicated, as esports is bigger than just one game. Popular esports titles are varied in genre (i.e. MOBA, FPS, Battle Royale), number of players per team (i.e. 1v1, 5v5), and even platform (i.e. PC, console, mobile). That’s where Modern Times Group (“MTG”), and its portfolio companies, ESL and Dreamhack, come into play.

ESL, formerly known as ‘Electronic Sports League’, is the world’s largest esports-dedicated company, offering services in gaming technology, event management, advertising, and media production. Each year, ESL runs 13 mega esports events with thousands of attendees and millions of viewers online. Most recently, ESL One hosted the Intel Extreme Masters Major in Katowice, Poland. The event saw attendance of 174,000 alongside 230 million viewers online17.


DreamHack is a Swedish production company specialized in organizing esports tournaments and conventions worldwide. DreamHack helped to pioneer esports and currently holds the Guinness World Record for the world’s largest LAN (Local Area Network) party.

In 2018, MTG reported a 41% increase in revenues for its owned and operated esports properties and an 11% increase in esports services sales18.


Lastly, Broad-Based opportunities like Tencent can provide an extensive exposure to investing in esports. They are deeply involved with the entire ecosystem, from game development to event organization.

Tencent (700 HK)

Tencent Logo

Newzoo Chart
Sources: Newzoo

Tencent is the largest gaming company in the world by revenue. It directly or indirectly owns the world’s most popular franchises: Fortnite, League of Legends, PlayerUnknown's Battlegrounds, Arena of Valor and many more. In 2018, it earned more than $19 billion in gaming software sales alone, representing 18.4% of the global market. Tencent, sometimes referred to as the Google or Softbank of China, is involved in nearly all the esports value chain.

Sources: Bloomberg, Newzoo

Below is a (non-exhaustive) list of Tencent’s gaming properties outside of those it owns and operates directly.

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Sources: Roundhill Investments

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