NERD ETF gains from strong demand for esports

The Roundhill BITKRAFT Esports and Digital Entertainment ETF share price has been lifted by continued interest in esports and video games, as well as the buzz generated by Microsoft’s deal with Activision.

The Roundhill BITKRAFT Esports and Digital Entertainment ETF [NERD], which tracks the esports market and listed companies in the video gaming industry, is firing again after a dip in late January. The share price hit a 52-week low of $22.16 on 28 January, but it has since risen 6% to $23.49 at the close on 11 February.

The recent boost to the ETF is largely the result of healthy demand for esports and video games, which remained strong despite the easing of the pandemic. Increased M&A activity within the gaming industry has also helped, with particular interest generated from Microsoft’s [MSFT] $68.7bn acquisition of Call of Duty games maker Activision Blizzard [ATVI].

Esports demand

According to figures from Insider Intelligence, there will be 29.6 million monthly esports viewers in the US in 2022, up 11.5% on 2021. Newzoo forecasts that global esports revenues will surge to $1.8bn this year, up from $1bn in 2021 and $947m in 2020. “The esports audience is young, diverse and growing, making the industry a magnet for attracting brand sponsorships,” it states.

Video games are also flying off the shelves, with recent figures from tracking firm NPD revealing that the US industry, including packaged media, digital, consoles and accessories, saw an 8% rise in sales in 2021 to $60.4bn.

This demand, combined with expectations of the growth of virtual reality and the metaverse — a virtual world of immersive experiences where people get together to watch, trade and play — has attracted interest from major tech stocks.

M&A in play

Microsoft’s acquisition of Activision — which Microsoft said would accelerate the growth in its gaming business across mobile, PC, console and cloud, and provide building blocks for the metaverse — was followed by electronics giant Sony buying games maker Bungie for $3.6bn. It has been reported that Sony is also eyeing up Electronic Arts [EA] as another potential acquisition.

All of this activity follows a difficult 12 months for the NERD ETF, which has seen its share price dive 39% following concerns that the reopening of society post-lockdown would dampen demand for gaming as people went back to bars, theatres and sports venues. Allegations of harassment and a ‘frat boy’ culture at Activision further hit investor sentiment, as did the Chinese government’s crackdown on Tencent [700], with under 18s restricted to three hours of video game playing per week.

The market has also responded to high inflation, a rise in interest rates and the continued semiconductor shortage by moving away from the high-growth tech sector into more value stocks.

Composition of the NERD ETF

The NERD ETF, which launched in 2019, has net assets of $62.47m, down from $87m in November 2021. Yet its year-to-date total daily return is at a loss of 5.75%, though this is an improvement on a drop of 9.4% last November.

It has 38 holdings, of which Modern Times Group [MTG-B] has the biggest weighting with 5.90%, followed by Activision Blizzard (4.87%), Tencent (4.64%), Corsair Gaming [CRSR] (4.68%) and DouYu International [DOYU] (4.35%).

Shares in Modern Times Group have risen 47% since the start of 2022, boosted by the sale of its ESL Gaming arm — the largest esports company in the world — to Savvy Gaming Group for $1bn. Savvy simultaneously bought gaming platform FACEIT and intends to merge the two companies to create the leading global platform for competitive gaming, known as ESL FACEIT Group. Modern Times, meanwhile, is focused on being a ‘pure play’ gaming group.

Shares in Activision Blizzard have increased 28% since news of its deal with Microsoft, which is still awaiting approval.

Though it is not just M&A boosting the NERD share price, it is also demand. Modern Times posted a 100% year-over-year sales growth in its gaming arm in the fourth quarter of 2021, and hardware maker Corsair recorded an annual sales hike of 8.1% in gaming components and systems.

Future growth

Roundhill is confident that demand will continue and expects esports viewership to grow to 646 million by 2023. This would represent a 10.4% CAGR from 2018.

Newzoo expects esports firms to up their monetisation models by using blockchain technology for rewards and loyalty programmes, and also expects companies to move further into the NFT space. It says that gamers are “digital native and curious” about new tech and “have more disposable income than the general online population”.

Add virtual reality, the metaverse and cloud gaming-as-a-service to that mix and the future looks pretty cool for the NERD ETF.