What drives the value of Gaming Companies?
The gaming industry has witnessed unprecedented growth in recent years, evolving into a multi-billion-dollar global industry. However, the FY2022 MGA Annual Report stated that ‘most operators also expect a surge in the costs incurred by the industry. Most operators expect to increase costs, including legal and professional expenses and marketing costs. Several operators have continued to engage in mergers and acquisitions to avert such cost pressures and consolidate their performance’.
Notwithstanding the significant growth rate and importance of this activity for Malta, the industry has limited sources of finance. As a result, the valuation of gaming companies became a topic of great interest for private investors. Several key elements play a crucial role in driving the value of a gaming company.
One of the primary drivers of a gaming company’s value is its intellectual property (IP), which also includes its brands, trademarks, copyrights and patents associated with their games. Strong IP often leads to customer loyalty, which can significantly boost a company’s revenue stream.
Furthermore, a forward-thinking approach towards technology is essential for a gaming company’s value. Investing in cutting-edge graphics, game-play mechanics, and so on, can distinguish a company from its competitors. Additionally, having a robust back-end infrastructure for server management, data analytics and content delivery is critical for ensuring a seamless gaming experience, which in return contributes to user retention and revenue generation. The success of Epic Games, the developer behind the popular game Fortnite, showcased the power of a strong intellectual property. According to the Wall Street Journal, Epic Games was valued at circa $ 31.5 billion in 2022.
Strong development capabilities are also very important for a gaming company’s sustained success. Consistently delivering high-quality updates retain player engagement and attract new ones. Moreover, an efficient and skilled development team enables timely and successful product launches, positively impacting a company’s reputation and ultimately its value.
The ability and capacity to adapt to market trends and maintain a competitive edge is indispensable for a gaming company’s value. Remaining up to date with shifts in player preferences and emerging technologies allows companies to seize new opportunities and mitigate risks. For example, the introduction of ESG poses a great opportunity for gaming companies to leverage and improve its reputation within certain segments of society. As highlighted in a recent article we published on ESG in the Gaming Sector, ‘in a world in which investors are increasingly viewing ESG matters as critical to understanding the risk profile of a potential target, then ESG should be seen to represent a critical tool in increasing the value of the company.
This can only be achieved if gaming companies adopt the correct ESG measures and ensure that they are embedded within the operations of the business, its culture, and its people.’
Whilst investments represent a major cost for a gaming company, these can significantly enhance the business value of gaming companies as they can boost revenues through increased Return on Invested Capital (ROIC); and accelerate Research and Development (R&D) periods, resulting in quicker revenue generation. Historically, it has been observed that Gaming companies with higher ROIC tend to exhibit a greater average business value compared to their counterparts with lower ROIC.
Conclusion
The value of a gaming company relies on various factors, from robust intellectual property to effective technological innovation. By maintaining a keen focus on these elements, gaming companies can position themselves for sustained growth and success in an ever-evolving industry. Understanding and leveraging these drivers not only enhances a company’s valuation but also ensures its longevity in the dynamic world of gaming!
Kris Bartolo
Business and Financial Advisory Partner
