THE Opportunlty of a Generation: the Litimate Score on A, Oigita Go D Mine
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THE OPPORTUnlTY OF A GEnERATIOn: The Litimate Score on a, Oigita Go d Mine ...,:: ------- . ....... ' ,,,.,, .. ,,,,,. , ..... TABLE OF CONTENTS Introduction.............................................................................................3 Demographic Shifts and Opportunities………..........................................5 The Millennial Hotspot............................................................................6 The Future of the Video Game Industry.................................................8 The Evolution of Sports……………….........................................................11 eSports Celebrities - 8-Figure Digital Athletes......................................14 An Enormous Money-Making Opportunity...........................................16 Microtransactions..................................................................................18 Market Sector Size.................................................................................21 Video Games - A Well-Kept Secret........................................................23 Featured Investment Opportunity........................................................24 Management and Ownership......................................................24 Portfolio of Assets.......................................................................27 Target Market and Comparables................................................32 Chinese e-Gaming Comparables.................................................36 Game Analysis: Revenue and Cashflow Targets.........................40 Growth Catalysts..........................................................................47 Summary and Valuation........................................................................49 INTRODUCTION In the old days, when prospectors found gold, they would usually try to keep its location secret. They wanted to mine as much as possible for themselves before word got out. Samuel Brannan took a more unconventional route. As soon as he found gold, he grabbed a bottle of gold dust and raced the 100 miles back to San Francisco. There, he ran up and down the streets, shouting, “Gold! Gold! Gold from the American River!” He got the word out however he could, even publishing the findings in his own newspaper, the California Sun. It worked. As word spread to the surrounding areas, people began rushing to Sutter’s Mill to find gold. Four months after Samuel’s first announcement of gold, the number of men in San Francisco had dropped from over 1,000 to just five according to the author of History of California, Hubert Howe Bancroft. Samuel's newspaper had to shut down for lack of readers. He didn’t care. He owned a general store at Sutter’s Mill, where the gold was discovered. In the week between when he learned of the discovery and when he publicized it to every living soul in San Francisco, he had bought up all the picks and shovels in the region. Prices skyrocketed due to limited supply. Soon his store was selling $150,000 worth of merchandise a month. That’s nearly $4 million today. In fact, no one benefited from the gold rush as much as Sam. By profiting from many of the 300,000 men who came in search of gold, he became the first millionaire minted by the California Gold Rush fo 1849. All because he knew he could make more money by selling supplies than by digging for gold. We owe the saying, “In a gold rush, be the guy selling pickaxes and shovels” to Samuel Brannan. 3 Something bigger and better than any gold rush is unfolding right now. And the first people and companies to arrive are already striking digital pay dirt in a big way. One company with a brilliant leadership team has taken a hugely profitable position in this exploding market: They are both mining for gold and selling pickaxes and shovels. Early investors in the company are positioned to benefit from both sides of this exploding market. Here’s why this company is about to make the California Gold Rush—the biggest peacetime migration of adult males in the history of the world— look tiny by comparison. INTRODUCTION 4 THE DEMOGRAPHIC SHIFT NO ONE IS TALKING ABOUT…YET For the past few decades, the spending habits of baby boomers have dictated a company’s success or failure. But that is no longer the case. Millennials (those born 1981-2000) are the generation that must be paid attention to now. The 2015 U.S. Census indicated that millennials already outnumber baby boomers by more than 8 million. The shift in numbers comes with a shift in dollars. While baby boomers’ spending is being phased out, millennials’ spending is rapidly taking over as the driving force of the economy. According to data from Accenture, the spending power of millennials in the U.S. alone will be an estimated $1.3 trillion by 2020—double the $600 billion millennials will spend in 2018. I see this generational “changing of the guard” happening in my own office. For the first 15 years of my career, I was the “young gun” in the resource sector. Now that I am one of the largest financiers in the industry, I find myself the oldest person in my own office. Everyone else is a millennial. Anyone not paying attention to this—one of the greatest cultural, demographic and economic shifts in history—will regret it. Think of Blockbuster CEO Jim Keyes, who made a bold statement to Motley Fool in 2008: “Netflix is not even on the radar screen in terms of competition.” Netflix was a tiny company at the time. Only trading at about $4 a share. But Mr. Keyes wasn’t paying attention to the beginnings of a massive demographic, technological and cultural shift. One that would see millennials cutting the cord and turning to subscription-based streaming video. Within two years, Blockbuster was bankrupt. Netflix is now worth about $400 per share. Or a 10,000% rise in under a decade. People who missed out on the Netflix rocket ship regret not seeing the direction millennials were moving earlier. Fortunately, they’ll get another chance. And it’ll likely be even bigger this time. 5 THE MILLENNIAL HOTSPOT In the early 1980s, when Space Invaders and Pac-Man were all the rage, arcades were the only place we could find and play video games. You know the type. The large, clunky arcade cabinets the size of refrigerators. Home consoles and desktop computers were next for video games. The shrinking size of electronics and the development of the internet led to increased market penetration for video game companies. Think Atari, Sega and Nintendo, which all burst into living rooms in the ‘80s. Now, nearly every person in the new purchasing power group—millennials—has a cell phone. 100% of U.S. adults eag s 18-29 own a cell phone (that’s not a typo). And 94% of those cell phones are smartphones. Millennials are spending a substantial amount of their time on those devices, playing video games. For example, last year, over 40% of the U.S. population reported playing at least three hours of video games per week. More than 55% of those were either millennials or Generation Z. In the chart below, you can see the video gamer population broken down into age groups… 6 For this generation, video games are a BIG deal. It’s not just that gamers are gaming more as video games become more accessible. As millennials and Gen Zers have pushed gaming into the mainstream, the number of gamers worldwide has grown steadily. There are 2.2 billion “active gamers” worldwide who play more than one hour once a month. In the U.S., gamers spend 50 million hours per day actively engaged in video games. 63% of households have someone in the house who games for more than one hour at least once a week. This is where the data gets really interesting. Households in the U.S. that have at least one gamer who plays more than an hour a week make 40% more than the average household in the U.S. In other words, gamers are a wealthier demographic than the average non- gaming household. As video gaming’s accessibility, popular appeal, and its target audience have grown, revenue growth for the video game industry has followed. In just the past eight years, the size of the video game industry has doubled. In short, millennials have turned video gaming into a $122 billion per year industry—and they’re just getting started. THE MILLENNIAL HOTSPOT 7 THE MIND-BLOWING FUTURE OF THE VIDEO GAME INDUSTRY The vast, growing video gaming population is headed in droves toward a relatively new concept called “streaming.” Any gamer can live-stream themselves on YouTube or Twitch. Twitch has grown to more than 15 million daily active users since being bought out for nearly $1 billion by Amazon in 2015. Twitch users spend a lot of time watching streams: Daily users watch for an average of 1.5 hours per day, and nearly half of users watch games for more than 20 hours per week. The top four television networks in the U.S. are shown in the chart below, alongside the top two streaming sites. As you can see, viewership on the two streaming sites is ahead of MSNBC, Nickelodeon and HGTV and is catching up to Fox News. 8 The next chart shows how big streaming is when compared to the top 10 traditional TV networks listed below. Video Game Streaming vs. Traditional TV Networks 1.6M 1.4M 1.2M 1.0M 0.8M 0.6M 0.4M Average Daily Viewership (Millions) Daily Viewership Average 0.2M 0 Now you might wonder why gamers would want to watch someone else play a video game. Why not just play it themselves? To understand, think of watching streams as almost like watching your favorite sports team or TV show. Except a game stream gives you the addictive ability to interact with the host of the stream live. And to follow their reactions and responses in real time. If you have a young child, nephew or other relative, ask them if they’ve ever watched a gamer play live. Once they’ve said “yes”—and they will say yes—ask how many hours of video gaming they have watched. The answer will surprise you. We have observed this movement firsthand. Every year, Katusa Research hires a couple of interns during the summer. THE MIND-BLOWING FUTURE OF THE VIDEO GAME INDUSTRY 9 The two interns we hired this summer were opposites: One was an engineering student, the other was in a business program.