The Razer IPO – A Pure Play Stock for eSports?
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It’s hard to believe that there’s not a correlation between the extent to which you fascinated over science fiction books at the library growing up (it used to be this place where you could rent books), and the likelihood you gravitated towards a career in tech like it was the only obvious option – then excelled at it. That’s probably because the way that the future is imagined in science fiction is often the way things turn out in reality. Science fiction broadens your mind to think beyond reality in the fast-moving world of tech, “to skate to where the puck is going to be” as Mr. Gretzky once said.
Let’s take the 4th Industrial Revolution as an example. They say that up to 80% of all jobs are going the way of the dodo. Everyone wants to focus on how we pay all these idle hands (universal basic income and all that), but we want to think about what all these idle hands will end up doing. “Oh, they’ll all just relax and do creative things like make music an art” everyone likes to say. Considering the excessive number of travel blogs and fashion blogs everywhere you look, seems like this is already happening. Someone actually did a study on the proliferation of the Italian fashion blogging market and this is how bad it’s getting:
For some, spending their day on Facebook looking at fashion blogs is entertainment enough, but for the type of minds that fantasize about fictional worlds, they’re going to need a place where their bright minds can be challenged, where their nerdy attributes can be idolized and rewarded. That used to be (and to a certain extent, still is) the star programmer. In the not so distant future, it might involve something called eSports. Before we get into that though, let’s talk for a second about video games.
How Big is the Video Game Market?
We don’t need to go into detail about how much fun video games are because a lot of you still play them. A gaming research company called Newzoo put out a research report commissioned by Razer for which they were paid $200,000 to produce. We say that only because with that amount of money spent, we can only assume that they did their due diligence. Did you know that in 2016 there were 2.1 billion active gamers? That means almost 1 out of every 3 people plays a video game of some sort with more than 70% of millennials spending an hour a day gaming. Just to show you how new this growth is, of the $101 billion in revenues generated by the global gaming market in 2016, 38% came from mobile. Let’s all agree that gaming is a humongous market (we just sent one of our MBAs off to investigate how we can invest in this theme for a later article).
What are eSports?
Simply put, eSports are multi-player video games played competitively by “athletes” in front of live audiences, but not necessarily in person. You may recall a company called Twitch which solely offered up videos of people playing video games (live and recorded). In 2014, Amazon acquired Twitch for nearly $1 billion and the following year Twitch views hit 100 million a month. This propelled eSports into the mainstream with a global audience exceeding 322 million people by 2016 and growing fast:
You can bet that all those people watching eSports are gamers themselves, so here you have a captive audience of 322 hardcore gamers that you can sell isht to. They’re also likely to be competitive gamers themselves, some even making a very good living from it. In fact, professional video game player made our list of 9 of the Best Jobs for the Future That Pay Well. With serious growth expectations and the owner of the New England Patriots backing a newly formed Overwatch League in the U.S., this thing is taking off like a rocket. If you’re a dab hand at gaming, just spend lots of time practicing and figure out where you can get some Adderall. Just don’t do anything dumb like match-fixing. For the rest of us old timers who used to stand around in Shopko playing Altered Beast after school, it may be time to invest in this theme.
Investing in eSports with the Razer IPO
One possible “picks and shovels” play for eSports just recently announced plans for an IPO. Founded in 2005, Los Angeles startup Razer has taken in $175 million in funding from investors that include Intel, Joe Lonsdale from Palantir, and a VC you probably have never heard of called Binary Capital. Razer has used all that money to build a leading global “lifestyle brand” for gamers that offers an integrated portfolio of gaming hardware, software, and services. When we dig into where they actually make their money from, we were shocked to see that nearly 3/4 of their revenue comes from selling peripherals:
That’s almost $300 million in 2016 coming from peripherals like mice and keyboards with another $90 million coming from systems (premium gaming laptops like this one). When we talk about peripherals, we are more specifically referring to things like high-precision mice, fully customizable keyboards, audio devices and headsets, console controllers, and $150 custom gaming controllers like this one:
With some eSports tournaments doling out over $10 million in prize money, it pays to invest in the best gear. Razer is a global leader in eSports with one of the longest histories of eSports sponsorship. 69% of PC and console gamers are aware of Razer and almost 40% of gamers in China say that Razer is their preferred brand. Team Razer is their eSports brand, and comprises 160 top eSports “athletes” from 22 different countries.
Other companies are taking notice of all the growth in gaming, companies like Logitech, one of the best-known brands of keyboards, mice, headphones, and webcams. Just a few days ago they announced the acquisition of a gaming headset maker Astro for $85 million.
Conclusion
Razer presents an interesting “picks and shovels” play for eSports. The bears will say things like “just how many overpriced mice and keyboards can you actually sell to these people” while the bulls will say “high-margin software is where they’ll make their money and they can sell just about anything with their strong brand“. Razer’s entry into software may just be what catapults them into profitability, something they’ve only been flirting with recently:
This IPO is looking to raise $600 million while giving Razer a valuation of $4-5 billion.
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