Here Comes the Videogame IPO Wave

At CLA, we're in your corner and on it. We coach tax strategies and Little League first base. We help you adopt AI data tools, and we adopt rescues named Buddy. We walk your factory floor and jog the local 5K, though sometimes we walk that too. Wherever you're coming from, we're right there with you. Wherever you're going, we'll get you there. CLA, CPAs, consultants, and advisors. Learn more at claconnect.com/withyou.

People consume for the rest of their lives the entertainment they fall in love with when they're 17. And so we've seen the cohort of video gamers continue to grow as people age. So today, an average player is 37 or 38 years old. And of course, there are new players coming into the market every year. So we expect there'll be growth in the business for the next 20 or 25 years.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard is Strauss Zelnick. He's the CEO of Take-Two Interactive, the company behind blockbuster video game franchises like Grand Theft Auto, where you drive around in fast cars and shoot people, and Red Dead, where you ride around on fast horses and shoot people. Shares of Take-Two are up over 1,500% over the past decade. Last year in particular saw massive growth for gaming. In a moment, we'll hear from Strauss about his plans to build on that success. We'll also talk about the coming video game IPO wave, which could include the makers of hit games Roblox and Fortnite. And we'll get some tips on how to be a successful birthday party clown. Yes, you heard right.

Okay, I've got a big gun.

Are you in the game?

I'm in the game.

With me as always is our audio producer Meta. Hi Meta!

Hey Jack!

Are you here? Do I see you?

I see a wall and a very big gun and now someone just Killed me.

I'm down already, like twice. We should explain to people before they become too alarmed that we're trying to meet up inside the video game Roblox.

Are you Ice Cream Girl?

No, my gamer name is— I militarized what I had for lunch today, so I'm Commander McRib. Are you Dinosaur Yanksangs?

Nope, my name is Cilantro Banjo?

Oh boy. I've been killed about 30 times so far, and we've been playing for about 3 minutes. Let me take a pause in the action here and explain to people that we're checking out Roblox because the company behind it is about to go public. Roblox isn't just a game, it's a game platform where users can design their own world and rules to create their own games, or they can just join popular games that others have created like we did. You can play on a smartphone or computer or gaming console, and it's free, but players pay real money to do things like change the appearance of their characters or furnish their virtual homes. Roblox is aimed at kids. The graphics are blocky and cartoonish. As a father of two, I can tell you that once kids try it, the requests for Robux that's the platform's currency, quickly become relentless. Like a lot of parents, I suspect, my wife and I were pretty strict about limiting screen time for our kids before the pandemic, but we've gotten lax. Normal activities for kids like birthday parties, organized sports, trips to those indoor play centers with bouncy castles, those are all on hold. My wife and I are pretty busy, so The screen time for our kids has just gotten away from us a little. We're working to bring it under control now. I'm hoping that will get easier after vaccinations become widespread and kids' activities resume. Of course, kids like the ones that were probably shooting me in Roblox just now aren't the only ones that have done a lot of video gaming during the pandemic. People age 45 to 54 saw a 60% jump in video gaming last year. That's according to market researcher NPD. The entire video game industry worldwide brought in an estimated $180 billion in revenue last year. That's $80 billion more than the worldwide movie business even before the pandemic. There were new gaming consoles that launched late in the year, and there were stories of Gangs of online scalpers buying up thousands of PlayStation 5 consoles and reselling them for double the original price or more. Hey guys, welcome back to Clownfish TV. This is Neon. I am here with Geeky Sparkles.

Hello!

And we're gonna talk about the Sony PlayStation 5 and the Xbox and how they can cost you up to $32,000!

Scalpers are selling them on eBay!

And just like buyers have scrambled for new consoles, investors have piled into shares of the big video game publishers. Take-Two stock ended last year up 70%. Activision Blizzard rose 56%. Electronic Arts gained 33%, and Zynga was up 61%. That's the company behind casual online games like FarmVille that are popular with Facebook users. Predictably, massive gains for video game stocks look to be setting off a wave of private video game companies going public. Roblox is played by 36 million people, and 7 million of them actively develop games for the platform. A recent funding round valued the company at close to $30 billion. The company plans to go public in February through a direct listing. That's where companies list their shares for trading, in this case on the New York Stock Exchange, but don't issue new shares to the public, which means they don't do it to raise new funds.

Welcome back to Yahoo Finance Live. It is game on for Playtica Holdings, the Israeli company riding the mobile gaming wave in its public debut with shares popping well over 30% right now after it was—

Earlier this month, the company called Playtica which makes casual casino-type games where users play for points or virtual rewards, raised $1.9 billion in an initial public offering. The shares were offered at $27 apiece. They recently traded at $32, which gives the company a stock market value of over $13 billion. There are more private companies investors are watching closely for IPO announcements, including the maker of a hugely popular shoot-'em-up called Fortnite.

It's affecting how kids talk, how other games are designed, how we celebrate in sports, and it's making Epic Games Inc.

hundreds of millions of dollars a month.

I want to know whether last year's gaming gains are sustainable for investors and what to make of the IPO rush. I reached out first to the man in charge of the top-selling video game property of all time. Hi Strauss, it's Jack Howe from Barron's. How are you?

Hey Jack, how are you? Can you hear me all right?

I hear you great, yeah. Strauss Zelnick has been CEO of Take-Two since 2011. He is not a lifelong video gamer who parlayed his creative passion into a management job. He's a longtime entertainment industry executive and investor who you might say kicked down the front door of Take-Two back when it had a big hit product and no end of management drama. The company had huge success 20 years ago with Grand Theft Auto 3. That's a video game which featured a massive open world called Liberty City. Here, players could roam freely, steal cars to race and jump, get in gunfights, or just deliver pizzas. Politicians denounced it as too violent, and sales took off. But through the early 2000s, Take-Two management created real-world mayhem. It overstated game sales, which helped it hit earnings targets. There was an options backdating scandal, which basically meant executives were being paid more than they should have been. One of the strangest developments in Take-Two's history is known as the Hot Coffee mod. It involved a Grand Theft Auto sequel called San Andreas. By downloading a modification from the internet, players of the PC version of the game could unlock a minigame buried in the software that had strong sexual content. And by strong here, I mean two clothed video game characters making whoopee. Yeah, I know, no one has used the phrase "making whoopee" since 1988 when The Newlywed Game went off TV. "Where specifically is the weirdest place that you personally, girls, have ever gotten the urge to make whoopee?" Well, I'm bringing it back. Anyhow, after that, Walmart and other retailers pulled the game from stores. None of these scandals really flattened the stock because the video game industry was taking off., and Take-Two had its hottest franchise. But the company went through a string of CEOs until in 2007, a group of big shareholders decided it was time for adult supervision, and it won the election of one of its own, Strauss Zelnick, as chairman. 4 years later, he would become CEO too. Strauss had run the music giant BMG Entertainment, and he'd been president of 20th Century Fox. Since Strauss took over, Take-Two has gone from swinging between profits and losses to turning out consistent and growing profits. Its scandals are a distant memory. The stock over the past decade has sharply outperformed those of Activision Blizzard and Electronic Arts, both of which have done pretty darn well. I asked Strauss how has he been successful in video games without being a gamer himself.

At all of the entertainment businesses I've worked in, I've never defined myself as consumer-in-chief or creator-in-chief. To the contrary, if I had any skill at all, it was to identify the best and the brightest and the most creative people in the industry and somehow to encourage them to join our enterprise and truly pursue their passions. And I think what are the companies I've been fortunate to be involved with have been known for is a strong, rational, and frankly sort of recessive corporate structure with a very conservative financial underpinning and a very aggressive, open, creative approach.

Strauss says his work isn't as important as the work that gets done in the field by his teams. He says his job is to honor that work and to try to bring it to, as he puts it, its finest and most perfect expression. Take-Two has had a lot of financial success during the pandemic. I asked Strauss whether that's sustainable. He said he doesn't want to take a victory lap at a time when so many people are suffering from the pandemic, but that it's clear the entertainment business benefited from so many people sheltering at home. He thinks those benefits might stick even after life gets back to normal.

When the world seemed to be returning to normal in late summer, our demand stayed strong and it has stayed strong ever since.

There's a high-class problem that comes with having a big year. Investors wonder whether you'll be able to top it. I asked Strauss whether he's concerned about difficult comparisons. He's not. He says that over the next 5 years, he expects to bring more than 90 titles to market, which is double the size of his pipeline just a few years ago.

What's so fascinating about this fiscal year for us is great as it has been so far and great as it is expected to be, it was still a very light front-line release year. The bulk of the titles that made up the year existed previously and they've been ongoing consumer experiences.

Much of the video game world has been shifting toward ongoing consumer experiences, as Strauss puts it. That means games live indefinitely online. For example, the latest major Grand Theft Auto release was number 5. It came out in 2013. It's still a big seller because gamers who buy a copy of Grand Theft Auto 5 get access to Grand Theft Auto Online, which is continuously updated with new content. Players spend real money for weapons, vehicles, businesses, and more. Come in, sir. Tell me, you after something to use on yourself or others? Another big Take-Two game, Red Dead, the cowboy game, came out with an online version in 2019. Other big games for Take-Two include NBA 2K21 for basketball and the Borderlands franchise, which is like a cartoon Mad Max type world but with a lot more guns. They say it's a wasteland, but it's Dangerous that only a fool would search for something of value here. I asked Strauss how he decides which games to turn into ongoing online versions.

When we put out a big title, we do expect virtually all of the time to bring consumers more content on an ongoing basis. But what we don't expect is you'll have some kind of living, breathing multiplayer world attached to every game. So for example, Borderlands 3 has a great deal of additional content, but it doesn't have an online world as part of it. So no, I don't think you would expect that every game can do what Grand Theft Auto, Red Dead, or NBA or others have done. The goal though is if consumers love something to try to give them some more of it when it makes sense.

Strauss says it's still early in the expansion of the video games business and that he expects it to remain a growth market for decades more. A decade from now, he thinks there will still be a role for the types of games we have today: console-type titles that sell for $60 or $70 apiece today, and freemium games where players log on for free and pay a premium for stuff as they go. But he also points to mobile gaming, which a decade ago barely existed and today is a $70 billion business. He says that 10 years from now, there will probably be a new type of gaming that we're not thinking of yet. What about virtual reality? Today, there are big visors you can wear on your head that make you feel like you're inside games. I bought one a while back and played a game with a mouse running through the woods. I used it maybe twice. It's cool, but not cool enough to make me want to strap a big visor on my head. Strauss says that for now, he doesn't think virtual or augmented reality are the next big things. He's avoided spending a lot of Take-Two's money on virtual reality, and so far that's paid off for investors.

We are mindful of all of our competitors' successes and frankly failures in addition to our own. We try really hard though not to emulate other successes because if you're busy developing derivative products, first of all, you'll never get to market in time. It takes too long to make interactive entertainment properties. Secondly, what turns into a hit is always something that was unexpected and different and special.

I wanted to ask about streaming. A few years ago, I was in Silicon Valley visiting executives at Electronic Arts. They took me for a walkthrough of an in-house show where game engineers had set up booths to show off what they've been working on. One woman showed how she could use artificial intelligence to draw large, unique landscapes quickly, and there was a guy who had figured out how to make virtual smoke more realistic. Away from the booths, around the corner in a private area, there was a team with a table and a monitor playing a relatively recent game at the time called Titanfall 2. Then they lifted up the skirt of the table to show that there was nothing under it. In other words, they weren't playing off a computer or a console or really any local processing power to speak of. They were playing off the cloud. The implication was that games, even sophisticated, power-hungry games, might one day all be played remotely, the way movies that once played on DVD players are today streamed over Netflix. If that happens, it's probably not great news for hardware makers, but it might open up a much larger audience for game makers. I asked Strauss whether he thinks streaming is the future of gaming.

I'm a believer that streaming technology will eventually work seamlessly. It doesn't right now, but I believe it will. I'm a believer therefore that the audience base can be potentially larger. I'm not sure whether there will be a need or a role for dedicated game consoles in 10 years, but if I had to guess, I'd say there will be. Certainly PCs or the like will continue to be relevant also. You're going to need some device to watch on, although if the world goes entirely to streaming, you could imagine just a smart TV or smart monitor being that device with a controller. Beyond that, that kind of doesn't matter to us.

Meta, am I missing anything here? Ah yes, clowns. I had heard that as a teenager, Strauss dressed up as a clown and did magic tricks at birthday parties for money.

The reason I did that is because I grew up in suburban New Jersey and the options to make money, which I wanted to do and had to do if I wanted spending money, was to work at, you know, in a fast food restaurant for minimum wage. And I tried that once. I did it for a week. When I came home at the end of the shift, my mother made me take off all my clothing in the garage because it all smelled so terrible. And I said, there must be a better way.

Now, lots of successful people had quirky jobs when they were young. When I spoke with Dallas Mavericks owner Mark Cuban on this podcast, he talked about how he once gave disco lessons. It wasn't my intention to ask Strauss if he had any hot tips on the clown business, but the subject came up, and he did.

But I have one rule: I only did birthday parties for kids who were 5 years old. Because below 5 years old, they couldn't follow the magic show. And above 5 years old, all they wanted to do was figure out what you were doing. So I only entertained 5-year-olds and it went very well. I made great money. It's how I bought my first car.

Excellent. Limits your total addressable market, but it gets you more enjoyment along the way. It makes perfect sense.

It worked for me.

To learn more about the outlook for video game stocks, I checked in with Eric Handler. He's an analyst at investment bank MKM. Hi Eric, it's Jack Howe from Barron's. How are you?

Good, Jack. How are you?

Eric is plenty bullish on the industry. He says games that appeal to kids like Roblox, the one Matt and I failed to distinguish ourselves in earlier, are acting like a funnel and bringing new players into the gaming world.

You know, and then what happens, you know, they get to a certain age where they want something a little bit more dynamic and Fortnite comes into play and they play Fortnite for a few years and they get good with that. And then, you know, they see people playing Call of Duty and they migrate to Call of Duty.

Eric is one of the people who is predicting a wave of video game IPOs. Companies like AppLovin, That's a mobile advertising platform and the maker of games like Project Makeover and Game of War. And Scopely, the company which makes Scrabble Go and Starfleet Command. And of course, there's Epic Games, which makes Fortnite. Eric says conditions for video game IPOs are just about perfect.

Video game stocks are at or near all-time highs. But that reflects an all-time high in spending, all-time highs in engagement. The secular trends continue to go more towards digital, new models are evolving. And you look, you just have some very strong and growing private companies. This is the strongest market for them to go public in quite some time.

Eric says he likes Take-Two as a company, but that it's not his favorite stock in the industry right now.

I think it's a great company. I love what they're doing with their future development pipeline, but the next 12 months could be a bit challenging from a growth perspective. Whereas, you know, when I look at Activision, which I like a lot and I think has good upside for this year, you know, they have the incremental levers for this year of Call of Duty Mobile in China, which just launched December 25th and quickly became the fourth highest revenue generating game in China. And that could be a $500-600 million game this year.

Lastly, I asked Eric about the future of video gaming. He mentioned more realistic graphics and more use of artificial intelligence and game design. But he also said that games where players build the worlds, like in Roblox, might become more common.

It wouldn't be surprising to me, particularly as coding becomes a lot more commonplace in school educations, that we see more user-generated type video game platforms. It won't just be Minecraft and Roblox. I could, you know, I could see that evolving to older demographics.

Meta, do you think when Eric talked about older demographics, he meant, you know, Cilantro Banjo and Commander McRib.

Affirmative, Commander.

Thank you for listening. Meta Lutzoff is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, please write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter That's @jackhoug. Meta, should we take another crack at this Roblox?

Yeah, let's try one more time, but I think it's important that we find each other and team up.

Hmm, good idea. How are we gonna find each other? Oh, you know what? We've got to, um, join friend— oh, invite friends.

Friends.

Oh! Commander McRib.

All right, now we're friends.

Did you get— it says error, something went wrong when I say accept.

That happens with a lot of my friendships, actually.

At Janus Henderson Investors, we believe working together is the way to work better, like combining your portfolio plans and our in-depth strategy. Your valued assets and our valuable insights. Your vision and our mission working in harmony to seek the right investment opportunities. Janus Henderson Investors, investing in a brighter future together.