Bloomberg
Even if you’re not interested in video games, you might want to know how to make money off “Fortnite,” one of the fastest-growing games of all time.
“Fortnite” is made by Cary, N.C.-based Epic Games, which isn’t publicly traded. But Tencent Holdings of Shenzhen, China, has a 40% stake in the company. Tencent and Epic are a perfect fit because Tencent is a worldwide distributor of games and a provider of various social-media services. Tencent has begun pre-registration for a Chinese version of the game after it caught fire in the rest of the world.
BAT vs. FAANG
Tencent is part of the “BAT” investment acronym, which also includes other Chinese companies Baidu and Alibaba Group Holding You’ve probably seen plenty of headlines about the U.S.-based “FAANG” stocks, which include Facebook Amazon.com Apple Netflix and Google parent Alphabet
The BAT stocks, unlike the FAANGs, have an overwhelming government-approved presence in China, dominating ecommerce, internet search and electronic-payment services, while Tencent has the largest game-distribution platform in the world’s most populous country. The BAT companies invest in scores of technology startups.
The big game
On Monday, Jefferies analyst Timothy O’Shea discussed a recent conference call with a group of 12-year-old children who said “98% of their friends” were playing “Fortnite.”
“Fortnite” is a shooter game that is free to play online as an individual or part of a team and not specific to any device. One can play using a console-gaming system or a PC, tablet or phone. Epic’s business model includes offering players the ability to change their characters’ appearance (or dancing abilities, for example) if they are willing to pay. There are various in-game items that can be purchased, and plenty of peer pressure on “newbies” to part with plenty of pesos so as to appear serious about the game.
O’Shea said all of the children “were spending real money” in the game and were “playing fewer other games.”
“All of them purchased the Battle Pass, and said ‘Fortnite’ is a top-spending focus,” O’Shea said. The “Fortnite” Battle Pass offers players rewards when reaching game milestones.
“Fortnite” was initially released in July 2017, but the full, free, cross-platform release was earlier this year, so we’re still at an early stage of what seems likely to be an industry-changing phenomenon.
Epic is making large investments in online “Fortnite” tournaments, which will include big prizes for winners. O’Shea believes it’s possible that “city-based teams are the future of eSports,” and there’s already a market for fans to watch online video games.
New business model
So the new business model for video games already means it doesn’t matter what type of equipment a player uses. It may become more difficult than ever for companies to sell self-contained video games. Meanwhile, it also appears that the new business model and its potential attendant market for game spectators are in their infancy.
It may be easy for adults to disapprove of a phenomenon like “Fortnite.” After all, if a student isn’t performing well in school, it’s easy to argue that the hours spent playing are wasted.
But as an investor, it can pay to understand the behavioral trends, especially over the long term, because there’s so much money to be made. As “Fortnite” expands, it is possible that Epic Games will decide to go public. If it does, shareholders of Tencent will already hold major amounts of the new stocks.
Even if it does not go public, holding 40% of Epic Games is potentially a tremendous windfall for Tencent and its shareholders. Tencent’s American depositary receipts (ADRs), incidentally, more than doubled last year. For 2018, they’re up only 2%.
More BAT vs. FAANG
Tencent is a very large company (its market capitalization is $494 billion), so its total investment in Epic Games may not be “moving the needle” much. But it is a major holder in a company that is at the forefront of a new business model that seems to be changing the behavior of gamers quickly.
Let’s take a look back at the BAT and FAANG companies. Here are growth figures for sales per share for both groups over the past 12 reported months:
First, the BAT stocks:
| BAT company | Ticker | Increase in sales per share - past 12 months from year-earlier 12-month period |
| Baidu Inc. ADR | 25.1% | |
| Alibaba Group Holding Ltd. ADR | 59.0% | |
| Tencent Holdings Ltd. | 57.9% | |
| Source: FactSet | ||
And now the FAANGs:
| FAANG company | Ticker | Increase in sales per share - past 12 months from year-earlier 12-month period |
| Facebook Inc. Class A | 46.0% | |
| Amazon.com Inc. | 33.0% | |
| Apple Inc. | 17.0% | |
| Netflix Inc. | 31.9% | |
| Alphabet Inc. Class C | 24.8% | |
| Source: FactSet | ||
Both groups are showing impressive sales growth, and the FAANG stocks have been excellent long-term performers. But it’s easy to argue that the momentum now is with the BAT companies.