As the popularity of video games turns out to be more than a temporary trend driven by pandemic lockdowns, professionals highlight the strong prospects for investment in these companies.

According to the latter Global Gaming Market Report by gaming data platform Newzoo, the global gaming market is expected to exceed $187 billion in 2024.

Forecasts show that the market will grow at a compound annual growth rate of 3.1 percent to reach around $213.3 billion in 2027.

"This video game and esports sector is relatively new and an emerging trend in the investment landscape," said Alice Shen, portfolio manager at VanEck.

In a conversation with InvestorDaily, she explained that the theme has seen a big jump in 2020 as people, especially the younger generations, have turned to video games as a source of entertainment.

“It has really grown since then […] on a more professional stage,” she said, pointing out that eSports has reached the Olympic stage, with the first Olympic eSports series taking place in Singapore in June 2023.

The next edition, renamed the eSports Olympics, is scheduled to be held in Saudi Arabia in 2025. and will be held every two years.

"We don't think this is a one-time phenomenon of the pandemic, it's very ongoing.

"We've seen some statistics from Twitch, the live video game streaming platform, and in terms of total streaming hours and online viewership, they remain elevated compared to pandemic levels," Shen said.

"This is a trend that we don't think is going away anytime soon and there will be more opportunities in this space."

VanEck's video game and esports ETF, ESPO, has about $64.5 million in assets under management and includes Electronic Arts, Nintendo, Tencent, Gamestop and Ubisoft among its 25 holdings.

Explaining the fund's performance, the investment executive pointed out that ESPO has outperformed the Nasdaq 100 and S&P 500 year-to-date, offering a different kind of technology exposure outside of the Magnificent Seven.

“Annual performance [of ESPO] is also strong, returning 21% over the past 12 months to the end of July,” Shen said.

As the global economy prepares for a rate cut in the second half of 2024, Shen said a lower interest rate environment is likely to support U.S. video game companies, which have seen company valuations compress over the past two years.

"With the market expecting four U.S. interest rate cuts by the end of the year, we really think there will be an upside or tailwind for these companies coming back," she said, noting that similar technology companies are likely to do well well in a rate cut environment.

Additionally, the prominence of artificial intelligence could serve as a tailwind, she told InvestorDaily.

Nasdaq-listed Global X's Video Games & Esports ETF has about $116.7 million in net assets and launched in late 2019.

Speaking to InvestorDaily, Billy Lung, investment strategist at Global X Australia, agreed that there is "only room for growth" within this theme as the user base expands and cloud-based gaming becomes more common.

"Another thing that's happening is vertical integration," he said, pointing to big publishers like Electronic Arts, Activision and Ubisoft losing ground to content creators like Netflix, who are "coming in to acquire small game developers."

"It will be a challenge to the original players," Leung said.

“Netflix is ​​already using content to create new games, its popular show Strange things now there is a game. Plus, Disney owns Marvel and Star Wars and is now building on those strong franchises and releasing games.”

This vertical integration is driving increased interest in mergers and acquisitions, he noted.

Most recently, Dublin-based video game group Keywords Studios, which offers services such as game translation and the production of game parts for other developers, agreed to a substantial offer of $4.1 million from private equity firm EQT. The company's shares are up more than 50 percent year-to-date.

“When I talk to clients and investors, they keep asking what's the next acquisition that could happen [in this space]Leung said.

Like Shen, the Global X strategist noted that the topic of esports and video games can play a unique role in investment portfolios.

“I think this topic is more niche, you have to really understand the market. I would say it's very similar to, say, the semiconductor industry. It's for people who have a very long-term view of it,” he said.

“If you look at the semiconductor industry, there's a lot of volatility — geopolitics, product delays — but ultimately the investment case is very solid and we're still seeing strong growth and technology improvements. It's exactly the same with online games.”

However, he also acknowledged that potential headwinds could affect momentum, such as antitrust laws that have already blocked big Asian players such as Tencent from making certain acquisitions.

In 2021 China's market regulator has blocked the company's plan to merge two of the country's top video game streaming sites, citing antitrust grounds.

“What I'm really worried about is, with more consolidation, when are we going to hit the mark when the US or the EU say they won't allow an acquisition?” Leung said.

Also, emerging technologies such as virtual reality (VR) and augmented reality (AR) can be challenging to implement.

"[It has] a lot of potential, but there is a barrier to adoption,” he said.

“I think it's still very slow, has a high cost and limited content because there's nobody really creating content where you can use VR and AR. The only one that does is Meta and they've toned it down a bit.”