We thought that this would be an opportune time to take a fresh look at the European games sector. COVID-19 has swept round the world and as we write, more than a third of the global population is in lockdown. This of course has tragic human, as well as economic, consequences. However, certain sectors provide some respite for those in lockdown. The games sector is one such beneficiary. Its youthful workforce and agile development allow it to adjust to staff working from home, as well as to capitalise on back catalogues of existing games and mature digital delivery channels. The small-cap European games sector offers exposure to a number of well run, innovative businesses, with recurring revenue models that will benefit from increased consumer demand fulfilled digitally.
As is widely recognised, the games sector has shown strong growth, with global video games revenues rising 7.2% to $148.8bn in 2019 and forecast to grow at c 8.4% (2019–22), reaching a total market size of $190bn by 2022. Mobile gaming offers a low double-digit revenue CAGR, while PC and console gaming offer singledigit growth (Newzoo) as we move towards a next-generation console transition in 2020.
In this report, we compare business models across geographies and look at how different segments of the market may be affected by COVID-19. In the first few months of the year business disruption was mainly confined to China and the Far East, with concerns over supply chains and stock levels to the fore in the West. Since then, the reality of a global COVID-19 pandemic has emerged, with more than a third of the global population in lockdown today. The transition from office work to remote working has caused significant business disruption, but for most games companies the disruption has been effectively managed with business continuity plans now largely implemented. Looking ahead, we see a period of [at least] three to six months with consumers isolated from normal activities and other forms of entertainment; while it lasts, this period will provide a substantial benefit for games companies.
The share prices of our universe of European games stocks has increased by 30% on average over the 12 months to 31 March 2020. As is set out in Exhibit 8, there has been limited consolidation of valuations in Q120, but the worst performers have tended to be relatively smaller, more challenged stocks, with larger, more liquid businesses seeing further share price appreciation in the quarter. The games sector offers a safer haven in troubled markets, with increased consumer demand for live games following lockdowns in the short term and a forecast continuation of growth in the long run. However, at current market levels, although value exists, investors will need to be selective in choosing their exposure.