Fool’s “Bezos is Dumping $970 Million into a Bizarre ‘2nd Coming of Netflix’…”

By Travis Johnson, Stock Gumshoe, February 14, 2019

Today we’ve got another spiel from the Motley Fool Canada to check out, all about a “next Netflix” opportunity… so what is it that they’re hinting at?

Let’s start with a little look at the ad — here’s the intro that caught our readers’ eyes:

“Discover Why Jeff Bezos is Dumping $970 Million into a Bizarre ‘2nd Coming of Netflix’…

“Not only will you find out why Bezos, the CEO of Amazon, is betting nearly a BILLION dollars on this surprising technology trend that he’s officially calling a “Global Phenomenon”…

“But you’ll also expose the ticker symbol of one under-the-radar stock we’ve officially started calling the ‘2nd Coming of Netflix’…”

Netflix has been the best teaser stock we’ve ever covered in this space, according to our tracking spreadsheets, so that’s worth investigating (it’s up about 14,000% since the Gardner brothers teased it for their Motley Fool Stock Advisor ad in 2007, just a few months after Stock Gumshoe was founded… and no, sadly, I didn’t buy shares).

What else do we learn about this one? First some more buildup of excitement from Jared George, one of the Motley Fool Canada writers (the ad is for Motley Fool Stock Advisor Canada, $179/yr, helmed by Iain Butler) …

“We can join a group of legendary investors who are betting on an entirely new, fast-emerging tech trend that has the potential to turn media moguls like Netflix on their head.

“Because even Netflix has told their shareholders that they ‘compete with (and lose to)’ this disruptive new trend…

“So when I found out that on top of that, Jeff Bezos, the CEO of Amazon, is one of the ground floor investors in this trend – my jaw hit the floor.”

And the person he keys on for this trend is someone who my kids are more likely to talk about than most pro athletes, Tyler Blevins…

“… when I heard this story of a kid from Chicago who stumbled on a wild craze that’s now making him a fortune, I genuinely didn’t believe it at first.

“But this story is completely true – and it all began with a 27-year old kid named Tyler Blevins.

“… Tyler grew up as an avid video gamer.

“In fact, he was so good that he even competed in a few tournaments as a teenager – and won thousands of dollars in the process.

“Despite blowing away the competition most of the time, he never really thought gaming would be anything more than a hobby and a way to occasionally make a few extra bucks…

“Which is why when he saw something highly-unusual happening on his computer screen, he immediately got goosebumps…

“Because what had simply been Tyler’s favorite pastime as a kid was turning into a money-making career…

“And all of a sudden, millions of people from around the world were paying to watch pro-gamers play video games online.”

So Tyler, who most kids will know as Ninja, started a streaming channel and other gamers started subscribing to watch him play video games… add on endorsements and the other stuff that generates cash for all pro athletes, and he’s making more than a million bucks a month doing what he loves to do. That’s pretty much the dream of every 12-year-old I know.

The connection to Bezos is that Amazon bought Twitch a few years back, and that’s the most well-known streaming service for video gamers (though plenty of them are also on YouTube and other platforms), and what the pitch is leading into is the general rise of “eSports” — a trend of turning video gaming into a large-scale sporting event through leagues, tournaments, and the like.

It’s still pretty early on, largely because there are so many companies involved, but it’s already a very large business. Here’s more from the ad:

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“THREE TIMES More People Are Watching Video Game Tournaments Than the Stanley Cup Playoffs and Super Bowl COMBINED ….

“… around 111.3 million people tuned in to watch the 2017 Super Bowl, one of the biggest sporting events in the world.

“But that same year, over 360 million people watched a tournament for League of Legends, one of the most popular video games in the world….

“… this opportunity is staggering no matter how you look at it… and the money being made is astounding.

“In fact, analysts at Digi-Capital did the math, and companies in this new age of entertainment should be worth $230 billion a year by 2021.

“That’s about 23X what Netflix made last year!”

OK, so if you pay attention to technology or video game investment trends you already know about eSports… I’ve been watching a couple stocks myself in recent months, wondering when might be a worthwhile time to try to place some bets on this trend. So I was curious, which specific stock are they recommending for this?

And we do get a few clues…

“… this ‘global phenomenon’ that has Jeff Bezos and David Gardner so riled up has Iain on the edge of his seat too.

“And he’s convinced that one innovative grassroots company is your single best way to get in on the ground-floor of this new-age entertainment wave right NOW.

“Because this industry disrupting company is taking advantage of the same trend that’s helping pro-gamers like Ninja make millions every month…

“And it’s copying Netflix’s unique strategy to a tee as it caters to an audience of over 2.5 billion gamers around the world.”

What other clues do we get to narrow it down?

“… this dark-horse company is creating its own library of original content, much like Netflix has done with TV shows and movies, but for video games.

“And they already have a subscriber base of over 300 million people around the world – more than DOUBLE the current subscribers to Netflix.

“This company is rapidly building momentum and it even earned an exclusive partnership with one of the world’s biggest entertainment titans, Disney.

“That deal alone single-handedly resulted in well-over $500 million worth of revenue for this trailblazing company.”

What else do we learn?

The stock has “skyrocketed” 268% in the past five years, so it’s not some unknown little startup. And it’s currently trading at “one of the lowest prices we’ve seen in over a year” (though that would be true of almost any substantial video game company right now).

And that’s about it… so, Gumshoe readers wanna know, who is it? Thinkolator sez this is… Electronic Arts (EA), which, like the other major video game companies Activision Blizzard (ATVI) and Take Two Interactive (TTWO) got clobbered in the second half of last year, and released disappointing earnings, but has started to recover a little bit.

The story driving everything, really, is Fortnite… the “battle royale” video game phenomenon that has been taking viewers away from Netflix and gamers away from their other favorite console games, resulting in disappointing numbers in the past quarter or two for the big game publishers. Fortnite is both good and bad for video game publishers — it’s a symbol of the importance of video games, including streaming video games that require relatively low-power equipment (it can be played on a phone or your Xbox or Playstation, with live low-latency battles involving players on different continents), but it’s also a huge and global hit with shocking staying power (so far, at least) that wasn’t created by the major publishers and isn’t owned by them (its developer is private, though partly owned by Chinese giant Tencent).

And that fear of Fortnite, really, is what has driven these stocks down from “beloved hitmakers with eSports potential” to “losers who can’t compete with Fortnite”. Probably neither tag was really accurate, but investors love to think in extremes and these stocks got awfully expensive at their mid-2018 heights and pretty much all got cut in half at the end of 2018 before recovering slightly… a really big deal for what are very large companies. Electronic Arts and Activision Blizzard are both $30+ billion companies, so back at their heights the two of them combined were almost as big as Netflix, with similar revenue numbers.

Electronic Arts has lately been the best performer, though, with a narrative that quickly changed after their disappointing earnings report last week — at first the stock fell a bit further, down to $80, as it was another “Fortnite is cutting into our sales and users” story, but then they shifted the story by announcing great numbers for, yes, their new Fortnite competitor — they announced that EA’s Apex Legends battle royale game, which is clearly similar to Fortnite but with a lot more variation, is off to a hugely hot start.

Like Fortnite, Apex Legends is a “free to play” game that makes money with add-on purchases that are mostly cosmetic in nature (you can make your character look cooler, but you can’t buy a better weapon), so there is also some global fear that offering these high-end games for free will be really hard on the premium games that the big publishers depend on. The opening weekend for a mega hit like Call of Duty (Activision) can easily outpace the opening of the biggest Hollywood hit at the box office, and since these blockbuster games take years to develop (at massive cost), they need buyers, not just players. And they’re not slowing down in developing these games, though all the major publishers did announce some layoffs and cost-cutting in the wake of being Fortnite’d.

Still, the video game companies do indeed realize the value of the “subscription” model — EA bought Gamefly a while back, getting access to a company that offered a game subscription service much like the original Netflix “DVD in the mail” service, and also getting access to Gamefly’s developers who are building online services. And they have been focusing on transitioning customers into subscribers, trying to offer up subscriptions that give access to all of EA’s games instead of selling the disks (or even selling downloads), which has a lot of long-term potential but also could depress sales while the program builds.

To my mind, EA and Activision Blizzard are really the key players in both online games and investment in video game streaming and eSports, at least outside of China. I’ve been thinking mostly about Activision Blizzard recently, mostly because their eSports league for Overwatch (their big battle game) is hugely popular and well established, with a league and team structure that mimics professional sports (and ownership by some of the same people who own sports teams), but I probably should take EA just as seriously — not only are they arguably further along in transitioning to a subscription model, but they also own a couple of games that are very popular both on their own right and for spectators, especially their long-dominant EA Sports titles FIFA and Madden NFL, with FIFA always among the most popular video games in the world, and maybe this Apex Legends game will finally take a bite out of Fortnite, we’ll see. It is a hit-driven business, and hits are hard to predict.

Haven’t bought any of these personally, but if you can stomach the volatility that comes from the overwhelming influence of Fortnite on the entertainment industry right now, and can go in with the assumption that Fortnite, too, will be a hit that fades and will make room for other titles to become more popular, then probably all of the big three are worth nibbling on at these prices. The trend of “more video games” is certainly not changing, we just don’t know how the winners and losers will evolve or whether the traditional mega-budget video games that have led the industry are going to be the way of the future… but in general, I like the idea of betting on the giants when they get beaten down. They’re usually more resilient than they get credit for, and in most games the biggest and strongest players end up winning.

But as I said, I haven’t yet invested in any video game stocks following the recent plunge… and it’s your money at stake, so it’s your thinking that matters. If you’d care to share that thinking with us, well, I’m sure we’d be delighted to hear it — just use the friendly little comment box below. Thanks for reading!

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February 14, 2019 1:08 pm

My 10 yea old grandson plays Fortnite endlessly. I will ask his Mom and Dad – who works for Nike corp. if they know about EA Electronic Arts new game Apex Legends; they are visiting us this long holiday weekend. Thanks Thinkolator.

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February 14, 2019 9:05 pm