Covid-19 has spelled doom for countless companies, but some industries have already risen from the ashes and are ready to rocket in the post-pandemic world – and e-sports seem to be playing the victor.
The Edge (the global leader for activist ideas, special situations and Spinoffs) had an exclusive interview with genius Zwift CEO Eric Min, who hinted an IPO is potentially in the company’s future.
With that idea in mind, The Edge decided to pick the absolute best e-sport stocks for investors to sink their teeth into.
These billion dollar giants include Tencent Holdings Ltd, Activision Blizzard, Inc.
Traditional sports moving to online gaming has been accelerated by the general politicization of sporting events on top of the pandemic restrictions. However, there will be no return to “normal” with spectator sports as we knew them, as disillusioned fans turn off due to The Great Pause of 2020, with almost 70% of 18-34 year olds now claiming e-sports are a significant part of their entertainment.
The opportunity for anyone to take part in multi-million dollar competitions like Fortnite without having to be an athlete is sparking not only more online competitions, but new, larger revenue streams for sports brands.
This has shaped the way for future sports, where anyone in the world can participate. And marketers are on the verge of a mega-trend with new formats, business models and experiences that consumers of tomorrow should expect.
In August 2019, Dan Fleeter was named The Madison Square Garden Company’s
Since their inception at Stanford University 48 years ago, e-sports have had exponential growth, and there is expected to be 646 million viewers of e-sports worldwide by 2023, an incredible increase from the 395 million in 2018.
So it’s an electrifying time for companies zipping their way to triumph, like Eric Min, CEO of Zwift, the virtual training for running and cycling phenomenon, who exclusively talked to Forbes about the global explosion in gaming and e-sports.
Launched in California in 2014, Zwift has had sensational traction with over 2.4 million accounts to date and is a truly exceptional example of what the future will look like. Zwift has thrived in the world of lockdown, bringing like-minded people together despite global group sports being banned everywhere.
You can read all of Eric’s answers in the Q&A below as he reveals Zwift may follow Peloton with an IPO. At the moment, the company is still in the careful hands of Eric’s fellow co-founders: Jon Mayfield, Scott Barger and Alarik Myrin, who bring unadulterated passion to their tech craft, and are planning to add rowing next… watch this space!
Standout E-Sports of 2020
Tencent Holdings Ltd (TCTZF, Market Cap: $636 billion)
Tencent, which was founded in 1998 and had an IPO in 2004, is Asia’s most valuable company, led by the powerful and mysterious 48 year-old Ma Huateng, whose net worth is $55.3 billion.
He is the visionary co-founder, chairman and CEO of the media juggernaut, as well as a Chinese business magnate, investor, politician, and philanthropist.
Tencent owns two of most successful gaming franchises of modern times: Fortnite (40% ownership in Fortnite’s parent Epic Games) and PlayerUnknown’s Battlegrounds (PUBG).
It also owns three of the biggest e-sports leagues: PUBG Global Championship (532 million views in 2019), League of Legends (viewership of 100 million people) and Rocket League Championship (18 million hours of live viewership) and currently leads the gaming and e-sports space.
Activision Blizzard, Inc. (ATVI, Market Cap: $60 billion)
Led by 57 year-old Bobby Kotick, whose net worth is $600 million, Activision Blizzard was founded in 1991 and floated on the NASDAQ small-cap exchange on October 22, 1993.
Kotick’s first dalliance with tech came in 1983 while he was a student at the University of Michigan, when he started Arktronics with friend Howard Marks in their dorm room.
These days, the publisher of games like Call of Duty and Overwatch (FY21E revenue of $7.6 billion and Adjusted EBITDA of $3.1 billion, margin 40.4%) has already launched two of the biggest e-sports leagues.
Overwatch League (started in 2018 with a total prize pool of $3.5 million in that year) and Call of Duty League (started in 2020 with a total prize pool of $6 million in the year) are chasing growth in the emerging e-sports arena.
The grand finale of the inaugural season (Overwatch League in 2018) attracted a total viewership of 10.8 million in broadcast and streaming formats, compared to the NBA Finals average viewership of 15.4 million that same year.
ATVI said in 2019 that its e-sports efforts are still at a relatively nascent stage, but the company sees it as a significant source of revenue in the future. Recently in February 2020, Activision Blizzard and YouTube reportedly entered into an e-sports exclusivity deal valued at $160 million, up from the previous deal of $90 million for Overwatch League exclusivity.
Electronic Arts, Inc. (EA, Market Cap: $39 billion)
EA is led by 45 year-old multi-award winning Australian-American CEO Andrew Wilson. He joined exactly two decades ago, and his net worth is $146 million.
Wilson was instrumental in the FIFA games franchise before becoming Executive Vice President of EA Sports nine years ago, as well taking over the company’s Origin games distribution platform two years later.
In the e-sports space, EA (FY21E revenue of $6 billion and Adjusted EBITDA of $2.1 billion, margin 35.4%) has partnered with FIFA to host the FIFA eWorld Cup (launched in 2004), where the 2019 season generated an online viewership of 47 million (an increase of 60% from 29 million views in 2018).
Take-Two Interactive Software, Inc. (TTWO, Market Cap: $16 billion)
Take-Two is led by 62 year-old Bostonian Strauss Zelnick, whose net worth is $201 million. He is a brilliant operator and penned the book, “Becoming Ageless: The Four Secrets To Looking and Feeling Younger Than Ever.”
Zelnick’s shrewdest move was buying Take-Two in 2007 after former Chairman and CEO Ryan Brant, who died in 2019, plead guilty to charges related to stock option backdating.
Zelnick doesn’t take a salary, and instead pays a management fee to ZelnickMedia after he took over at TTWO in 2011. He famously staved off an acquisition by rival Electronic Arts in 2008.
TTWO (FY21E revenue of $3.5 billion and Adjusted EBITDA of $865 million, margin 25%) has partnered with the National Basketball Association (NBA) to establish the 50/50 joint venture NBA 2K League. Inaugurated in 2018, the NBA 2K League content has generated more than 393 million video views across all social media platforms (Facebook, Twitter, Instagram, Twitch and YouTube).
The Edge View and Valuations
The Edge believes the strong traction in e-sports (particularly its viewership strength) makes ATVI, TTWO and EA compelling investment opportunities at current levels.
These three US companies trade at a nearly 20% discount (at an average FY21E EV/EBITDA of 16.7x) compared to the market leader Tencent (TCTZF, at 21.9x).
Additionally, their net cash-positive balances and attractive EBITDA margin profiles (at an average 33.3% in FY21E) makes them hard to ignore.
Exclusive Q&A With Eric Min, CEO Of Zwift
1) You and your fellow founders, Jon, Scott and Alarik, started the company in 2014 – how did this come about and what were you doing?
I’d recently exited a successful venture with my business partner Alarik, and was looking for the next challenge. I was encouraged by Alarik to seek opportunities in the area that I was most passionate about – cycling. I looked into many different areas, but the one I settled on was indoor training.
During my time at Sakonnet, I was (still am) living in London with a young family, and it was really difficult to cycle. I only ever had limited time, so heading outdoors was never worth the effort (I can come up with a dozen reasons), so I was doing most training indoors. Like most people, I found it pretty dull.
I’d tried all the distractions out there, from watching box sets to riding a piece of equipment called a CompuTrainer – the first real smart trainer. However, the thing that was really missing was the social interaction of riding with friends and other cyclists. I thought it must be possible to use the power of gaming and the internet to create something much more social.
I took to the internet and began searching for ideas until I came across a post on the Slowtwitch forum discussing a product that had been developed by Jon Mayfield.
Jon had faced a similar challenge to me. He was a keen rider and had found himself training indoors having started a new family. Jon comes from a gaming background and had developed a game to keep himself occupied while riding indoors.
I messaged Jon, and after an exchange online, I agreed to meet. I flew to LA shortly afterwards with Scott Barger. There had been others interested in Jon’s creation, but I think I was the first to jump on a plane and meet with him face-to-face.
We went for a ride and had a great meeting. Jon quit his job just a couple weeks later. The idea for Zwift was born (though the name didn’t come until later). The rest, as they say, is history.
2) What are your roles now? And is everyone still actively involved?
All of the co-founders continue to have an active role in the business. Alarik is our Chief Strategy Officer, Jon continues to lead on new product concepts and ideas, and Scott remains an active advisor to the company.
3) Zwift did not begin charging customers a paid subscription for 13 months – what prompted this decision? Were any customers unhappy with this?
The goal was always to launch the product as a paid subscription service. However, we knew we would need to build a community first. We ran a very successful closed Beta period – we had 13,000 register for the first program in the first week.
We were always upfront about our plans, so the Beta community remained very supportive, many of whom continue to subscribe to the platform today.
4) How many customers do you have at the moment? And how many are you projecting in five years? Are you profitable?
We don’t disclose active subscriber numbers, but we’ve had over 2.4 million accounts created on the platform since launch.
We continue to experience strong growth Y-o-Y and have plans to expand into other sports beyond cycling and running – rowing will be next.
We are not a profitable business yet. We are still very much in the growth phase as a start-up business.
5) You’ve had a lot of private investment, including B-series funding of $120 million – will you IPO?
I think a lot of people look at the success of Peloton and make direct comparisons. They’ve been very successful since their IPO, so it could also be possible for Zwift.
At this time though, we have a great group of investors who understand and believe in our long-term vision.
For now we’re focused on hitting our subscribers targets and developing the product into exciting new areas. The product roadmap spans multiple years which is exciting. There is no shortage of great ideas we need to execute on.
6) How has the Covid-19 situation changed your outlook on business? What opportunities do you see?
Covid-19 has undoubtedly had an impact on the business. As an at-home fitness solution, the platform itself was actually very well positioned and we did see a jump in subscribers over the period.
We also noticed that Zwift served as a social outlet for people – helping them to remain connected when they were otherwise isolated.
We have a Private MeetUp function that allows people to organize mini private events with their friends or club mates. We not only saw an 8x jump in the number of MeetUps taking place, but we also had to double the attendance cap for these events. People were taking their outdoor rides to Zwift.
We also saw an opportunity for e-sports to shine. We’ve been developing e-sports for some time and have partnered with the world cycling governing body, the UCI, to host the first UCI Cycling eSports World Championships this year.
While there has been no real-world sport, Zwift has been an outlet for many. Unlike most simulation sports platforms, Zwift is the sport – physical exertion in real life powers avatar performance in the game. It’s much more in-line with what we traditionally view as “sport.” The jewel in the crown is taking place right this minute, as we host the first Virtual Tour de France for Men and Women – featuring all the riders who would tackle the regular event in July.
Moving forward, I really see at-home fitness solutions as being the future. Convenience is king, and we provide fitness and sporting competition on demand. There are over 300 events taking place on the platform each day, and hundreds of thousands of like-minded people in our community for you to socialize with.
7) Do you plan to introduce any new real city courses?
We have a mix of real-life and fantasy courses. Most courses based on real-world locations are connected with an event, like the UCI Road World Championships or the Tour de France.
The beauty of our fantasy world of Watopia is that you aren’t bound by what already exists – you can design a world that’s totally optimized for the needs of your community.
When we design real-world locations, there needs to be a reason. We use these courses as opportunities to bring people closer to events – bringing those events to our community. This is what we are doing with the Virtual Tour de France.
As well as hosting and broadcasting the race, we are providing a participation opportunity through the Virtual l’Etape du Tour. These events provide Zwifters around the world to test themselves on the very same courses as the professional are racing.
8) In respect of fantasy courses, can you tell me what proportion of customers prefer these courses to real life?
Watopia is by far our most popular world. Approximately 50% of all workouts done on Zwift are done in Watopia.
9) Your eSports Professional Cycling League is going great guns — what’s the dream for this?
We want to develop a new discipline for cycling. Zwift is incredibly accessible and removes many of the obstacles that come with traditional sport, and especially cycling.
With Zwift, it doesn’t matter how expensive, light or aerodynamic your real-world bike is. As long as you have the trainer and can put out the power, you can be as competitive as anyone else in the game.
Travel costs are removed, and I know from experience as a junior competitor in the US, travel costs can be incredibly prohibitive, never mind the time associated with it. Zwift also removes obstacles with road closures – a current problem that especially impacts amateur and grassroots racing in the sport.
Ultimately with Zwift, the goal will be to build franchises that teams can monetize on a long-term basis. The challenge with road cycling today is that the teams live hand to mouth, reliant on sponsors.
As a result, team names change, so the only constants are the riders, which makes it difficult to build a franchise brand. One day, I could imagine competition in arenas based in cities with ticket sales – more like what you’d expect to see from basketball for example.
Ultimately though, e-sports needs to be a stimulation for participation. We want Zwift to bring people into the sport and enjoy an active lifestyle. There’s no reason why kids in the future couldn’t start with Zwift and then progress to road cycling or track for example. We want people to watch Zwift and then want to go and “play Zwift” the way one might do for tennis.
10) You must be delighted with the Zwift Tour De France introduction, but do you believe that someday the world will be ready for mixed gender cycle teams, and if so when?
It’s definitely a possibility. Last year, the UCI introduced a new mixed-gender Team time Trial event at the UCI Road World Championships, so it’s already on the cards. You also see it in other sports, like tennis.
Gender parity is very important to us, which is why we always run competition with equal races, equal courses, equal prize money and equal exposure between both the men’s and women’s races. Extended mixed gender events is absolutely possible and very likely to happen on Zwift.