Chance to gain access to the gaming industry
Naspers has been one of those “love to hate” stocks, especially in recent times, as the share has pulled back about 21% from the record highs it reached in November last year.
Many of the Naspers perma-bulls seem to be starting to lose hope. This erosion of confidence — and of the share price — is of course exacerbated by a recent drop in earnings below what the market was expecting for Tencent, as well as some regulatory headwinds faced by Tencent’s gaming business in China.
The internet giant is Naspers’s biggest investment, through earnings rights to just over 30% of it.
Ironically, the two issues mentioned above are related.
Tencent’s earnings were lower because regulators put a freeze on the selling of new items and on other in-game or in-app purchases.
Gaming is a huge industry, generating 48% of Tencent’s profit, and it is set to expand much further.
For some perspective on just how big it is, compare it to the third-largest gaming company in the world, Activision Blizzard (in which Tencent has a significant stake).
Activision Blizzard earns revenue of only $7.7bn, compared with the $12.7bn that Tencent’s gaming division generated last year.
Each year Activision Blizzard hosts Blizzcon, the world’s biggest gaming and cosplay (costume play) convention.
Last year this event was attended by 35,000 people, with another 10-million virtually attending by tuning into various live internet broadcasts and streams.
This year attendance is expected to increase, both
physically and online.
As the industry expands, the influence it is having on children and adults around the world must be understood, and ultimately it must be regulated.
The issues of violence and morality are often raised when games are discussed, and gaming companies should be aware of the impact their products have on society.
But that doesn’t mean it’s game over for the sector. This is an industry that is coming of age. People are starting to sit up and take note of it.
Chinese authorities are concerned that children are becoming addicted to games, obsessing about them, to the point where it starts to influence behaviour, so that, for example, they do not leave the house or eat.
But though there are addictive aspects to gaming — and legitimate concerns about that — things are also happening in the space that are having a positive effect on the players as they interact with each other.
Another concern the Chinese government has raised in the recent freeze on new game licences was that there has been a surge of cases of nearsightedness among Chinese youth. This probably opens the door to a study of the physical effect gaming can have on the human body.
We cannot ignore the shortterm impact of the bad news on share prices, but we can think opportunistically and use that bad news and negative sentiment as an opportunity to buy some shares in companies that are likely to have very long and prosperous futures.
So here is an opportunity to gain access to the gaming industry through owning Naspers.
The company’s management has reiterated several times that the business is now too big for the JSE and that it is looking to break the group up and list its pieces on several exchanges around the world.
I believe that will unlock value for shareholders.
The “rump”, as it is called, can be left to plod along at its own pace, while the highgrowth, high-value investments will be able to trade up to fair value without the weight of the SA business holding it down.