Gaming - Looking at a Period of Growth
The technology industry is currently going through a difficult cycle in in which consumer habits are normalizing. However, as with most downturns, we do not expect this situation to last long. Most long-term trends remain intact. In many cases, they have been accelerated by the pandemic. Examples include e-commerce, cloud computing, digital marketing and digital entertainment. In addition, many subsectors are still in the early stages of growth. These include 5G, artificial intelligence, industrial automation, autonomous driving and the IoT (Internet of Things).
The most important factor behind the sell-off in many tech stocks is the reopening and shift in consumer spending away from goods and toward services. A somewhat simpler explanation is that consumers are shifting their spending to experiences as society opens up. This negatively impacts technology stocks as a whole. In addition, interest rates are rising and investors prefer profitable growth rather than growth with a low level of profitability.
Video game market is still poised for growth
One area where we are particularly bullish at the moment is video gaming. This sector has a very attractive demographic profile in that the average player is still in their mid 30s, compared to late 40s for the average consumer of traditional entertainment such as TV and streaming. This provides the basis for a long growth period with regard to users. Despite these attractive growth prospects, shares in the sector suffered losses after the reopening. The sector is now at a level that suggests that the period of growth is behind us, which opens up attractive opportunities given our differing view. Video game companies make up about 1.5 percent of the benchmark index, while we have about 10 percent of the fund invested in the sector. For example, among the stocks we view favorably in the sector is Take Two Interactive, the owner of famous game franchises such as Grand Theft Auto, NBA2K and Red Dead Redemption. The company is led by possibly the best management team in the sector, has an extensive pipeline of AAA games for the next few years, and is about to enter the mobile gaming space full force with its recent acquisition of Zynga. Despite this compelling lineup, the stock is trading below its normal valuation.
Enterprise software is also an interesting investment area. Covid has accelerated demand for digitization across all business lines and is a driving force behind high organic revenue growth at Microsoft, the DNB Technology Fund's largest holding. German software company SAP, which trades at a discount to both its normal valuation and the overall market despite revenue growth of 5-10%, is also a convincing choice.