Sorapop/iStock via Getty Images
Sorapop/iStock via Getty Images
We revisited Van Eck Video Gaming and eSports ETF (NASDAQ:ESPO) sooner than we expected to. Blame a pair of seemingly unstoppable stocks that this ETF can own because enough of their business revolves around its target industries. While the ETF is up 12% since our hold rating, versus about half of that appreciation for the S&P 500, this is not an equity market area for the faint of heart. We see a snowball effect that may not last into next year, but which prompts us to re-evaluate here and upgrade this niche ETF from hold to buy. The risk is high, but the return potential should the market continue to melt up in this area is just too much to pass up.
ESPO has benefitted from a few superstar stock holdings, including Nvidia (NVDA), which have grown so much in recent months, that stock is now 13% of assets, while Advanced Micro Devices (AMD) makes up another 11%. That's what happens when a couple of stocks outperform the rest of the portfolio by the gigantic margin those two have.
ESPO is riding a wave of momentum in the types of stocks it owns, even if the video gaming business is only part of what it contributing to that price appreciation. The portfolio sells at about 28 times trailing earnings, but the 5 year expected earnings growth rate is 33%. It is not often we see a ratio like that. And, while we don't know how long the market will favor these types of stocks, the technical picture is the tiebreaker for us. More on that below.
VanEck Gaming and eSports ETF (ESPO) is a focused portfolio of companies who earn at least half their revenue from video gaming and esports. Relevant industries including game development, gaming-related software, and streaming services, and also casinos and online gaming. The resulting portfolio is typically 25-30 stocks, with a maximum weighting at the time of each quarterly rebalancing to any stock of 8%. ESPO goes beyond the gaming-only ETFs, but like most of its peers, it spans the globe, with holdings in the US, Japan and China, primarily.
First off, we love the uniqueness of the gaming/esports sector, and think it’s an area worth looking at. Growing up in the nineties, our parents would buy us Nintendo devices and video games as a way to keep us kids distracted. The average gaming player is over thirty years old, meaning real adults with real money are spending money in this sector not only for their kids, but for themselves as well. So it’s no wonder gaming revenue is expected to grow from $227 billion in 2023 to $312 billion in 2027, which comes out to 7.9% CAGR.
In 2021, viewers in the USA alone steamed 15 million years’ worth of content. Projections show that by 2024, 45% of Western Europe’s population will be internet streaming users. Not only that, but APAC streaming revenue is expected to grow to $54 billion by 2026.
This is where esports comes in. It is a form of competition using video games, where streaming media platforms are the conduit. So not only will streaming services benefit, esports will as well because streaming services have become so widely used. Not only that, but there’s still so much room for growth Internet streaming sources are breaking into the emerging markets, particularly rural parts of Indonesia, meaning more areas for growth.
We like that this ETF is not as much of a niche fund as the Roundhill Video Games ETF (NERD). NERD was created to track performance of video game publishing and video game development companies.
Compare this peer ETF to ESPO where the constituents don’t necessarily have to be gaming companies, rather involved in relevant industries including game related software and streaming services. By NERD being too specific of an ETF, they are missing out on potential gains from streaming services and software tech companies, such as NVDA. The numbers speak for themselves. ESPO has outperformed NERD over every 1 year rolling period since late 2021, as shown here.
ESPO has been rewarded with a higher level of assets under management than these peers.
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ESPO is the most focused of the group, only slightly in terms of top 10 stock weighting, but clearly in its mission to limit holdings to about 30 stocks.
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This chart shows ESPO' price moving above its 200 day moving average. That's a positive sign, but the chart below this one is more interesting to us.
That second chart shows the spread between ESPO's price and that 200 day moving average. And our quantitative eye notes that it is breaking out in a similar pattern that it did back in 2020, which launched the ETF about 50% higher in a relatively short time period.
Of course, that was the pandemic and E-Sports were replacing other activities. But the bottom line is that momentum is present, and this is still a momentum market.
ESPO and its peer ETFs do not include companies like Microsoft (MSFT) and Apple (AAPL), who have invested billions in the gaming business. That would have accelerated results further.
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But because gaming and E-sports do not constitute 50% of their revenue, they are excluded. In particular MSFT acquired Activation Blizzard in a $69 billion dollar deal in 2023. That gives "Mr. Softie" ownership of the publisher of Call of Duty, World of Warcraft and other lucrative franchises.
Given the risk characteristics, encouraging technicals, and future industry projected performance, we upgrade ESPO a buy, in the hopes that the market momentum continues to favor this market niche, and that this ETF's quarterly rebalancing and 8% single stock cap will act as a disciplined portfolio management factor for this indexed fund.