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

by Travis Johnson, Stock Gumshoe | February 14, 2019 12:54 pm

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[1], 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:

“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!


Endnotes:
  1. our tracking spreadsheets: https://www.stockgumshoe.com/tracking/

Source URL: https://www.stockgumshoe.com/reviews/stock-advisor-canada/fools-bezos-is-dumping-970-million-into-a-bizarre-2nd-coming-of-netflix/


  1. 641 |
    Avatar
    steveflick
    Feb 14 2019, 01:08:48 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.

      • 641 |
        Avatar
        steveflick
        Feb 18 2019, 03:51:30 pm

        @Lulu, my grandson, “11 in 2 months!”, says he does not like EA’s Apex Legends for several reasons; 1. same as Dave Heck comments below, too bloody/too life(dead) like. 2. same as Rowan below, he doesn’t like 1st person shooters (looking through persons eyes) as compared to overhead (drone) view of playing field. 3. not as many players can play battle royale as Epic’s Fortnite. 4. a dead player can be ‘resurrected’ by a teammate, I don’t like that. 5. I can’t build things in Apex Legends; I asked, like Minecraft?, his answer, no like Fortnite, I can build a large panel wall, etc.

        I then asked if he thought Apex Legends can make a dent in Fortnite popularity, he said, oh yeah, gamers are always looking for something new, and this will probably be popular with older teens and people in 20’s.

  2. Avatar
    Rowan
    Feb 14 2019, 01:15:49 pm

    If you listened to people last month you would have thought that EA was about to die, and that no one would ever be buying their games again. They’re had numerous terrible releases in the past little while like Battlefield 5 and Starwars Battlefront largely due to the fact that their marketing schemes are confusing and widely known to be predatory. EA’s newest game (one that was designed to outpace MMO’s and first person shooters alike and may have had a real chance at hitting fortnite) turned out to be a disaster because of the marketing for the game (Anthem). The genius of this latest marketing scheme was that they didn’t do any marketing at all. They acquired a company (Respawn) that made a game that never hit well, and then announced this game the same day it launched so that no one could yell at them and hurt the game’s sales. For me, the success of Apex Legends, and the EA stock in general, hinges on whether they intend to make this their chief moneymaker (cutting off the game Anthem which investors seemed to be proud of), and if they can just keep their mouth shut and not try to market it themselves. I’m not sure I would count on it raising their stock too much, but that’s just me.

    • 11441 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Feb 14 2019, 01:48:59 pm

      Indeed, they’re more focused on the casual games for smartphones than on the big platform games, but there’s plenty of money in that space, too (as Candy Crush reminded us a few years ago, in the surge that inspired Activision Blizzard to buy its producer for something like $6 billion).

      • 1287
        Avatar
        Lulu
        Feb 14 2019, 09:10:31 pm

        kentusm – so did I ?…. Remember many gummies are following on their phones, there is nothing to give us an idea what you are referring to as all iPhone users see is your post, nothing before or aft. It is helpful to always refer to past post and/or add the ticker you are speaking of. Cheers

  3. Avatar
    Jack
    Feb 14 2019, 01:41:27 pm

    Another kind of disruptive technology and people’s taste can turn on a dime. I would definitely buy but with a stop order to cover my butt.

  4. Avatar
    mesh2222
    Feb 14 2019, 02:52:45 pm

    Thank you Travis for getting an old guy hip to what the youngsters are in to. Prior to your column I had not even heard of Fortnite. So my question is who is making and marketing Fortnite and can we invest?

    • Avatar
      rgalbraith13
      Feb 14 2019, 03:01:13 pm

      Fortnite is made by Epic Games and while you can’t invest in them directly there might be other options like Tencent (who own a stake and recently also invested in Reddit). A better bet in this space might be someone like MSFT as they are in the gaming industry but way less risky (IMO).

    • 11441 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Feb 14 2019, 03:25:47 pm

      Fortnite creator Epic Games is private, but their biggest investor is Tencent, which is public. Unfortunately, Tenxent is a $400 billion company and their share of Epic is worth something like $5-10 billion as of the valuation at Epic’s last funding round in October (they raise $1.25 billion, reportedly at a valuation of about $15 billion on the strength of Fortnite’s reported billion dollars in in-game sales), so you’d have to like the rest of Tencent to want to buy it. Disney and KKR are also smaller investors in Epic, though, again, not big enough to move the needle for those large companies (unless, of course, Epic somehow turns into a shocking $100+ billion behemoth in a few years).

  5. Avatar
    Walter P
    Feb 14 2019, 04:03:18 pm

    Wasn’t Activision Blizzard hit with a class action suit last week for misleading investors about the status of their partner who makes one of their most popular games (they parted ways with the said partner getting all rights to the game and its future releases)?

  6. 74 |
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    bunion132
    Feb 14 2019, 05:19:55 pm

    Didn’t EA stock plunge some 13% just last week due to disappointing earnings AND the guidance for the next quarter? A couple of days later, it went parabolic the other way. So where was this promising Apex Legends in the guidance they reported? Or, is Motley Fool’s (or any newletter’s, for that matter) hype so powerful that people ignore Earnings Reports?

    • Avatar
      Deone
      Feb 15 2019, 04:54:29 pm

      They announced Apex Legends one day and released it the next. Surprise releases are nearly unprecedented in the industry, but that’s why it wasn’t in it’s quarterly guidance.

    • 11441 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Feb 17 2019, 10:28:56 am

      Bezos (Amazon) bought Twitch a few years ago… that’s the video game connection, it’s indirect.

  7. 49 |
    Avatar
    stockgumchew
    Feb 14 2019, 05:50:54 pm

    Video games have been generating billions in revenue since at least the early 2000’s…not exactly a “hot disruptive new trend”. I recall an interview with Mark Hammill where he said Wing Commander(he did voice work for it) made more money for Star Wars upon release.

  8. 71 |
    Avatar
    hunter007
    Feb 14 2019, 07:31:31 pm

    You can cover he whole gamut and buy shares in the ETF, ESPO from VanEck. Trading today at around $30 and the management fee isn’t too much. My Tencent worth…or eh hem, my thoughts.

  9. Avatar
    joycee
    Feb 14 2019, 07:40:14 pm

    I have a feeling that even if it will take a while for Jeff Bezos, with his new interests in the entertainment world,…to go through his half of his present fortune..he is high on some pretty out there projects… such as a rival to the Game of Thrones franchise and overpaying for the rights to some other GRR Martin work.. he has gone “Hollywood” in a stupid way…so perhaps his judgement isn’t what it used to be…

      • 11441 |
        Travis Johnson, Stock Gumshoe
        Travis Johnson, Stock Gumshoe
        Feb 18 2019, 09:31:14 pm

        Twitch was a brilliant investment by Amazon, not quite as incredible as Google’s purchase of YouTube but still likely to be very profitable.

  10. Avatar
    Jonesie
    Feb 14 2019, 09:55:29 pm

    A “picks and shovels” way into the video gaming market listed in London would be Keywords Studios” that provide services to a wide range of game makers without the need for predicting the individual games that will become winners.

  11. Avatar
    Blind Guide
    Feb 15 2019, 01:46:41 am

    Interesting! Memory says that ATVI has been one of David Gardner’s reco’s & re-reco’s over the years and I’m a bit surprised that their Canuk affiliates have diverged in that space. Maybe both are ‘worthy’ holdings as you suggest, Gummy! BTW, what do you make of the recent hype of David & Tom’s “Ultimate Buy”?

    • 11441 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Feb 15 2019, 09:49:18 am

      Those “ultimate buy” pitches mostly have been about The Trade Desk (TTD) lately, which I’ve covered many times (and own). They’ve used similar spiels for other stocks, too, but TTD has been the main focus for the “ultimate buy” pitches lately (they just use “ultimate buy” or similar language to pitch stocks that both David and Tom have agreed on, which they see as a strong signal). TTD tends to be make big moves on earnings (sometimes down big, too, not just up) and they report next week, so it could be wild ride.

  12. Avatar
    Jaho15
    Feb 15 2019, 04:46:55 am

    I have been following gaming industry for a while, 2011 said to my parents to invest in Activision because video games are now breaking records from Hollywood. From the article the business side is well said but I would like to add something from the gamers.
    EA isn’t very popular with gamers due to the fact it is seen as huge corporate that only focuses on money. But then again, everybody still buy the new FIFA, NHL and Madden every year and the players use big amount money in the online microstransaction (sorry I’m not a native English speaker so there can be typo).
    Activision has been more popular with gamers, but 2018 was terrible for them. Bungie (Destiny) and Diablo game failures and focusing more on smartphone games, which can be smart move but disagree.
    The company Respawn, that made Apex, was formed by old workers of call of duty developers from the golden era of COD. So EA might have the possibilty to gain from Respawn knowledge.

  13. Avatar
    Dave Heck
    Feb 15 2019, 11:39:44 am

    My 11 year old son says Apex Legends is to bloody, which is where I think the line is drawn between children and teens. The biggest games will please all ages. His new favorite is Sea of Thieves.

  14. Avatar
    safetynames
    Feb 15 2019, 05:08:41 pm

    I took a medium position yesterday. All else being equal, 25M players in the first 7 days is poised to become a (paying) success. And EA is indeed a long-term winner!

  15. 18 |
    Avatar
    anastasia
    Feb 15 2019, 06:20:55 pm

    EA is the first one among the three to have recently recover , soar up and that, over its MA(100).
    Short term profit target +10%.

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