Gaming has always commanded attention, but now it’s driving culture and the broader entertainment landscape. In the last few years game intellectual property has been the source for some of the biggest movies and TV shows, such as The Super Mario Bros. Movie, A Minecraft Movie, and The Last of Us. The inaugural Olympic Esports Games will take place in Saudi Arabia in 2027. Despite the industry’s momentum, many investors remain anchored to its history of volatility when evaluating opportunities. However, we believe several trends are starting to inflect that could make the industry both more stable and profitable, leading investors to assign higher valuation multiples to the best-positioned gaming stocks.

While most people are familiar with how popular video games are, the industry has historically been challenging to invest in. First, it is a hit-driven business with up-front development costs. It can be very difficult to forecast which games will become hits or flops ex-ante. Just like in Hollywood, many games do not even break even. Consequently, many companies have become dependent on just a handful of key games for the bulk of their profit.

Video game developers are typically under immense pressure to meet deadlines which has led to toxic work environments and overwork. Burnout is high in the industry and there have been several allegations of disturbing behavior. When developers do lay off the gas, game releases often get delayed, which is always a disappointment to fans and investors.

From a top-down perspective, Covid also complicated the investment landscape. Video game stocks massively outperformed in 2020-2021 as the world was stuck at home, only to sell off as society reopened and interest rates began rising. Many stocks were also caught up in China’s crackdown on the industry when the regulator stopped approving new games and began imposing new restrictions on minors.

These factors have contributed to inconsistent performance and oftentimes low multiples for game developers relative to other entertainment and content-driven investments. However, several emerging dynamics suggest that the industry is poised to deliver better investment returns going forward.

The first trend is a growing number of evergreen games. These are games with long-term popularity and player engagement that continue to generate profits for many years after the initial release. Often, there is a high amount of inertia as gamers continue to play these games because of the progress they’ve achieved as well as the social groups they’re in. This means that hit games become franchise platforms with recurring sales rather than one-time transactions.

While evergreen games have been around for a long time, we find that they are proliferating even more now given digital distribution and better cross-play between devices. Additionally, these games offer new monetization models such as battle royale (free-to-play, highly social, and streaming friendly). You can have multiple “seasons” of the same game just like in live sports, which offers the chance for special events and novel marketing collaborations, with only limited incremental cost required.

We think that gamers have become increasingly preconditioned to support these types of games as the business model and consumer behavior is now well-entrenched. This means higher lifetime-value-per-game and a more stable revenue stream compared to ongoing product launches.

Next, we are optimistic on the potential for AI to invigorate the industry. AI tools in game development will allow for more efficient asset creation and quicker development cycles. It should allow human developers to produce more, be more creative, and spend less time on monotonous tasks. This means higher developer productivity and less burnout, which should help to improve the culture, pace, and predictability around game development.

AI has already improved the in-game graphic experience. For example, Nvidia’s Deep Learning Super Sampling (DLSS) uses AI to improve image quality, reduce latency, and increase frame rate. Going forward, AI will not only enhance graphics but also gameplay. There will be more personalized game options, richer open-world settings, and smarter non-playable characters. All of that means games will be richer, more dynamic, and ultimately more engaging.

Shifting to a top-down perspective, gaming is one of the cheapest forms of entertainment available. It is rumored that Grand Theft Auto VI could cost between $80-100. That’s an increase from the price of GTA V ($59.99 for the standard edition in 2013). But there are still hundreds of thousands of people playing GTA V roughly 12 years after its launch. If you very conservatively assumed those players have played for 500 hours that comes out to roughly $0.12 per hour. The real number is likely much lower as industry data suggests American and Chinese gamers spend 11-13 hours per week across all platforms (625+ hours per year) . This indicates there is unrealized pricing power in gaming because in a high-inflation world gaming remains one of the best values in entertainment. (While it is beyond the scope of this note, we would also argue that gaming fills an increasingly important social role in a society where people are hungry for more personal connection).

From a financial standpoint, changes in mobile app store policies could lead to improved economics for mobile gaming. While the legal outcome remains in flux, a recent court stay means iOS Apps in the US can now direct users to the web for purchases and avoid the platform in-app payment system. This would save developers money that could either boost profitability or facilitate lower pricing to grow volume further.

Competitively, the gaming industry has consolidated over the past few years. Many of the biggest development studios now fall under the global platform giants. While purists may bemoan a less dynamic indie developer landscape, this gives the leaders more diversification and potential for better IP monetization, especially in movies and TV.

Finally, we believe the Chinese studios are increasingly competitive on a global scale. While Japan has long been a key player in gaming, Chinese companies were historically more confined to the domestic market. We now observe global IP owners going to the Chinese companies to develop games as they are very effective at churning out hit games.

Our strategies hold several positions in the gaming industry as we see good opportunities at the company level that dovetail with this broad industry evolution. There will always be hits and flops but we see the potential for more durable engagement, better monetization, and more stable earnings growth. As gaming continues to command cultural attention and consumer time at a scale rivaling traditional media, investors would be wise to give the industry the same level of strategic focus.