The video games segment is absolutely a work-from-home beneficiary after the start of the pandemic outbreak.
Leading game developers from US-listed Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) to Japan’s Capcom (TSE: 9697) have all enjoyed extraordinary returns this year.
According to a market research report on the “Gaming Market – Growth, Trends, Forecasts (2020-2025):
The global gaming market was valued at US$151.55 billion in 2019 and is expected to reach a value of US$256.97 billion by 2025, registering a compound annual growth rate (CAGR) of 9.17% over the forecast period (2020-2025).
Some people argue that some lifestyle changes during the pandemic period will stay with us even post-pandemic.
Spending more time at home and increasing demand for in-home entertainment are some examples.
From an investor’s perspective, the video games-related segment is an attractive investment theme to capture the accelerating trend.
Other than the pure game publishers and developers, one may also be interested in companies that design and build gaming peripherals and systems.
Razer Inc (SEHK: 1337) is one of the few pure players in this sub-segment, which focuses entirely on building the gamer-focused ecosystem (i.e. from gaming mice, keyboards, laptops/desktops to virtual credit services and game booster software).
In the recent investor presentation, Razer reported some key financial highlights:
- Record high revenue of US$447.5 million with 25.3% year-on-year growth.
- Gross Profit Margin improved to 22.0%.
- Positive Adjusted EBITDA of US$3.2 million, beating expectations.
- Cash flow from operating activities turned positive to US$66.0 million.
- Cash Balance of over US$500 million with no debt.
The core segment of gaming hardware (peripherals and systems) accounted for 85.5% of its revenue with 26% year-on-year growth compared to the first half of 2019.
This is, by any measure, an impressive growth rate in the current economy. Similarly, Logitech (NASDAQ: LOGI) has recorded an even more spectacular 38% year-on-year revenue growth in the gaming segment during the most recent quarter.
Though not a perfect product-mix comparison between the two companies, Logitech seems to have better managed its gross margin at 39.2% with its long-term gross margin target of 36-40%.
After all, Logitech is a profit-generating company while Razer is still experiencing a net loss even with a positive adjusted EBITDA.
Is fintech a competitive edge?
But there is something unique about Razer with the desire to expand into fintech – digital payments and banking.
Its e-payment system, Razer Pay, is already available in Singapore and Malaysia. Similar to most popular mobile payments, Razer Pay can make purchases, transfer funds, and support its own virtual currency – Razer Gold & Silver.
However, it is worth noting that Singapore’s mobile payments space is quite competitive with larger players such as Grab, DBS, Favepay, EZ-link, and Alipay dominating the market.
It may be challenging for Razer to gain material market share for the average consumer who is not a gamer. Furthermore, the firm also has a vision to redefine banking for youth and millennials worldwide.
In January 2020, the company announced that Razer Fintech has submitted its application for a Digital Full Bank License to be issued by the Monetary Authority of Singapore (MAS).
The video games segment is a growing sector that investors should keep following. Razer is a unique company in this space with a predominant focus on high-quality gaming peripherals and systems.
Razer’s financial metrics are certainly improving thanks to the fast-tracked demand during the pandemic period, but its profitability still lags behind its competitor – Logitech.
Fintech is perhaps a future growth engine for Razer, but it is surely too early to tell the long-term implications of this on profitability.
Summing up the above, long-term investors may still put Razer on their watch lists and take a wait-and-see approach on how the company will further improve its financials and if it can monetise its fintech business.