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19 Jan 2021
Into the Metaverse — the Gaming Industry and Its Byproduct that Will Shape Our Future
by Candice Wan, Analyst, Caelus Hong Kong Office

2020 has been a challenging year for everyone, but it is also boosting the stay-at-home economy during COVID-19 quarantines and lockdowns. Market conditions are favorable to industries such as e-commerce, food delivery, media and entertainment, and teleconferencing software. Among the thriving industries, the gaming world has evolved quickly during the pandemic outbreak, where the release of Nintendo’s social simulation video game series “Animal Crossing: New Horizons” became an immediate hit in March 2020; and some gaming companies hold in-game virtual events to stimulate business growth. As reported by Modor Intelligence, the global gaming market was valued at US$151.55bn in 2019, and is estimated to grow at a CAGR of 9.17% in 2020-2025, reaching US$256.97bn in 2025.
The gaming industry is gaining traction in the venture capital (VC) and private equity (PE) world. The TGE (Tech and Gaming) Index which tracks over 1,200 companies in the video games ecosystem, reveals that during April to December 2020, 150 investment rounds led by VC and PE firms have totaled US$4.230bn in transaction value, while 21 rounds jointly led by VC/PE and corporations have totaled US$3.069bn. The collective amount of US$7.298bn contributes to 19.60% of total investment recorded over the nine-month period, overtaking IPO and secondary public share issuances.
(*data is based on investment rounds that are publicly disclosed)

The most notable deals led by VC and PE firms include ValueAct’s purchase of 2% stake in Nintendo, valued in excess of US$1.1bn at the time; Macarthur Fortune Holding’s acquisition of Runescape developer-publisher Jagex for US$535.1m; and Epic Games’ US$1.78bn funding round consisting a host of VCs, primary capital and secondary purchases from employee equity holders at a valuation of US$17.3bn.
In the public market, Unity Software Inc. raised US$1.3bn in an initial public offering (IPO) in September 2020, at a US$13.6bn valuation. Unity Software makes tools for developers to create games and other computer-generated entertainment, and its game engine, Unity Engine, runs on thousands of consoles, mobile, and PC titles. On the first trading day, the stock jumped 44% and is currently trading at nearly US$40bn in market capitalization. Unity’s successful IPO and trading debut conceivably serves as a fundraising benchmark for private gaming companies.

Some say Unity's IPO is a threat to Epic Games, in which its Unreal Engine is often being quoted as the closest comp to Unity Engine. We envisage that compared with Unity, Epic Games will have even higher intrinsic value given its larger market share, monthly active users, technological capabilities and expansion into non-gaming verticals. Despite the fact that Epic Games has not officially endorsed a plan to participate in an IPO, we expect the Unreal Engine alone could unlock similar, if not higher, valuation than Unity on the public markets. Hence, it is useful to study Epic Games to get a glimpse of the future of the industry.

Case Study: Epic Games
Epic Games, Inc. is a video game and software developer led by founder/CEO Tim Sweeney since 1991. Epic is the developer of the game “Fortnite”, the gaming engine “Unreal Engine”, and the parent company of social video network “Houseparty”. Epic has over 2,000 employees across 25 offices worldwide with headquarters in Cary, North Carolina.
In 2019, Epic generated $4.2bn in revenue with 45% gaming EBITDA margin and 20% overall company margin. Fortnite is one of the world’s largest games with over 350 million accounts and 2.5 billion friend connections. While Fortnite is extremely lucrative, Epic is further capitalizing on its popularity and venturing into the events business. In 2020, Fortnite produced Marshmello and Travis Scott in-game concerts, which transformed the scene of live performances in virtual worlds. Epic Games reported that 10.7 million players showed up for the Marshmello concert whereas 27.7 million unique players and 12.3 million concurrent users participated in the Travis Scott concert event. According to The Esports Observer, Travis Scott grossed approximately US$20m for the in-game performance and merchandise sales. For the sake of comparison, Scott’s 2019 Astroworld tour secured US$1.7m for a single night, with the full tour grossing US$53.6m.
Epic is also moving beyond the gaming category by building the “next iteration of the internet”. It has been called the Multiverse, Metaverse, or 3D Internet. Oxford Languages defines Metaverse as “a virtual-reality space in which users can interact with a computer-generated environment and other users”. It will be made up of hyper-realistic, shared, 3D virtual spaces linked into a perceived virtual universe that mimics the real world, where we can meet, shop, work, go to school, socialize, etc. It will eventually replace the 2D, search-based internet that we are currently surfing.

This evolution of the internet has been the realm of science fiction writers, but the necessity of interoperability, compatibility and persistent user identity across immersive worlds is now very real. However, Epic is not alone in this race. Over the last few years, tech giants such as Facebook, Google and Samsung have been making substantial investments in cloud computing and virtual reality companies in anticipation of a Metaverse.

The Metaverse reality is still years away, but having said that, Epic Games is at the forefront, developing an array of interoperable systems required for new immersive and interactive internet experiences to a massive global developer community.

The Future of Gaming
Asia Pacific is the largest gaming region worldwide, while the US has the largest video games presence in the world. As the number of games increased exponentially over the last decade, many gaming companies and geographies are reaching maturation which creates opportunities for incumbents in emerging markets. India, with a massive base of 360 million gamers, is growing at 40% year-on-year, surpassing the US as the world’s second largest gaming download market in 2020. Turkey, Indonesia and Vietnam continue to be gaming innovation hubs.

The pandemic has offered a phenomenal boost to the gaming industry and results in higher consumer spending. With innumerable options to choose from and the rise of AR and VR, gaming is now all about the experience, and players in the industry are competing to offer a highly immersive and captivating experience. This new demand has bred the emergence of the Metaverse that has indefinite potential to change our world. With that being said, there has never been a better time than now to invest in a gaming company especially one that has innovative technologies to expand beyond its core industry and revenue sources.

The author is a Securities and Futures Commission licensee, and no part of the author’s compensation was, is, or will be, directly or indirectly, related to the specific material contained herein. The author does not personally hold the mentioned relevant shares.

The commentary, news, research, analysis, prices and other information published in this column can only be viewed as general market information, which is for reference only and does not constitute investment advice. Caelus Asset Management Limited is not responsible for errors, inaccuracies or omissions in the information, and does not guarantee the accuracy or completeness of the information, text, diagrams, connections or other items contained therein. The company shall not be liable for any special, indirect, joint or consequential damages caused by the materials, including but not limited to loss, loss of income or loss of profit.