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#1: Savvy Games Group is Becoming a Gaming Monolith

Savvy Games Group, a subsidiary of Saudi Arabia’s Public Investment Fund (PIF), bought gaming company Scopely for $4.9 billion on April 5th. The deal is still subject to regulatory approval. This ranks as the sixth largest gaming acquisition of all time, behind Activision Blizzard’s $5.9 billion purchase of King in 2015. It is also the first major game industry deal this year, given Playtika’s deal to buy Rovio was called off last month. 

Saudi Arabia’s investment fund is among the largest in the world. Gaming has been a big focus for the PIF’s investment strategy, as Crown Prince Mohamed Bin Salman, the de facto ruler of Saudi Arabia, is a long-time gamer and is said to be an avid Call of Duty player. The fund first invested in gaming when it bought minority stakes in large publishers like EA, Take-Two, and Activision Blizzard in December 2020, which at the time amounted to approximately $3 billion in total. This allocation was also done during the height of gaming and tech stock euphoria, indicating that this trade is long-term and strategic in nature.

The PIF has since made numerous other investments in gaming public equities. In January 2022, it undertook its biggest step yet, when it launched the Savvy Gaming Group subsidiary, which is also headed by Prince Salman. Savvy’s investment mandate is to purchase properties in gaming and esports, to capitalize on the growth of the sector, and to diversify Saudi Arabia’s energy-led economy. 

Later that year, Savvy unveiled a $38 billion investment strategy through 2030 to turn Saudi Arabia into a “global hub for gaming and esports.” The fund earmarked approximately $13 billion toward the acquisition of a leading game publisher, $18 billion for minority stake investments in game development, and $5 billion for investment in “mature industry partners.” A smaller amount was also set aside for VC-type investments in early-stage gaming and esports companies. 

There was much speculation that the $13 billion would be used to acquire a large games publisher outright, with likely candidates including those companies the PIF had already purchased a minority stake in. However, Take-Two and EA are well out of reach in terms of valuation, and Activision, which is also too expensive, is in the process of being acquired by Microsoft. Aside from these three companies, which are also the gaming constituents of the S&P 500, the Kingdom had to look elsewhere in its portfolio. One candidate is Capcom, which the Kingdom has been an investor in since February 2022. The PIF owns around 4% of the company, which has an enterprise value of $6.7 billion and market cap of $7.4 billion as of April 6th.

After turning into the largest esports company in the world with the combination of ESL and FaceIT last year, and the additional purchase of a stake in Chinese tournament organizer VSPO, the fund has now turned its sights toward the broader industry. Furthermore, instead of purchasing just one publisher/developer outright with the $13 billion, it seems like Savvy has opted to make numerous mid-cap acquisitions. This latest acquisition of Scopely pushes the value of Saudi Arabia’s video game holdings to just over $20 billion. 

Before talking about Scopely, it is important to underscore just how important of a gaming investment player Saudi Arabia has become. If we combine the deal value of the 15 most active VCs in gaming since 2020 (as seen below), it is still $2.5 billion shy of the investments made by Savvy and the PIF. The fund has been a persistent buyer of video game companies even during the doldrums of late 2022 and early 2023, helping to support valuations as investors speculate which company may be next. 

This approach is reminiscent of Chinese tech behemoth Tencent, which frequently acquires sizable stakes in foreign games companies. But unlike Tencent, the PIF is not subject to domestic regulatory approval or shareholder demands, meaning its strategy is more unconstrained and has a time horizon of many decades. 

Scopely is a mobile-first gaming developer and publisher based out of Los Angeles. The company primarily publishes social multiplayer games that are free-to-play and earn revenue through in-app purchases. These have included popular titles like Star Trek Fleet Command, Marvel Strike Force, and The Walking Dead: Road to Survival. Many of Scopely’s titles are based off multi-year partnership deals with entertainment properties. In addition to the in-house Scopely Studios, the company also works with numerous partner game studios, providing support in areas such as marketing, user acquisition, analytics, and monetization. Scopely operates out of 14 locations across three continents and employs around 2,000 people according to estimates. 

The company has raised $1 billion in funding over 10 rounds, with the most recent being a private secondary market round in October 2021.  Coincident with this round, Scopely purchased GSN Games from Sony Pictures Entertainment for $1 billion in cash and preferred stock. Sources close to the deal stated that a valuation of $5.4 billion was used to determine the stock portion of the transaction. Prior to this the company’s last formal valuation was after its Series E in October 2020, when it was valued at $3.3 billion post-money. 

The Saudi PIF’s all-cash purchase of Scopely is in between these valuations. At $4.9 billion, Scopely is valued 9% less than it was in late 2021, which is a positive given how much private tech valuations have been upended since then. The company will operate autonomously under Savvy Games Group with its same leadership team in place. Scopely generated approximately $611 million in microtransaction revenue in 2022 on Apple’s App Store and Google Play, according to data from our partners at data.ai. 

While Savvy has said Scopely will operate autonomously, there appear to be synergies between Scopely’s development capabilities and Savvy’s existing esports holdings. Mobile esports are extremely popular in the MENA region, led by games like PUBG Mobile, Call of Duty Mobile, and Mobile Legends: Bang Bang. 

The company will likely be used to kickstart a broader vertical within the group as well. In a press release, Scopely CEO Javier Ferreira said that the acquisition would allow it to expand beyond mobile into PC and console. If these capabilities can be built under the tutelage of Savvy, perhaps the PIF does not need to go out and buy a mega publisher after all. 

Savvy Games Group is composed of five operating companies. These are: 

1. ESL FACEIT Group: A global esports company that resulted from the $1.5 billion combination of ESL and FACEIT in January 2022. The Group purchased esports technology and infrastructure provider Vindex in March 2023.
2. Nine66: A services provider for game developers and publishers. Nine66 primarily targets the MENA region, and provides resources for companies interested in relocating to Saudi Arabia.  
3. VOV: An architectural firm tasked in building the next generation of gaming and esports venues. The subsidiary also plans on fostering esports through facilities that will train players on their path to becoming pros. 
4. Savvy Games Studios (SGS): An integrated games studio with two primary teams, one focused on mobile-first casual games (the SGS hybrid team), and one focused on mobile-first core games (SGS core team). SGS plans on acquiring existing studios and gaming IP to complement this strategy. 
5. Savvy Games Fund: The venture capital and investing arm within Savvy Games itself. The Fund’s goal is to “make commercially-driven acquisitions” that enable its targets to improve “the user experience across their products and services.”

It is very likely that Scopely will be slotted into the SGS portfolio. What is confusing, however, is that Savvy Games now “aims to create a world-leading games studio in Saudi Arabia” with a mobile-first focus. Scopely fits this exact description, but the California-based company will be operating autonomously and presumably retaining its identity. Savvy Games’ other mandate is to acquire “existing games or games studios” under SGS, but with Scopely having significant infrastructure already in place, it would make more sense for it to be folded into SGS itself.

With about $8 billion in gaming assets, Savvy Games Group already ranks as one of the largest gaming companies in the world. Embracer Group, which similarly operates as a conglomerate, has a market capitalization of $5.5 billion. But after 2030, when the full investment plan is realized, Savvy could look a lot closer to a gaming giant like NetEase or EA. The most interesting aspect of the group is that it’s held within a country’s sovereign wealth fund. This gives it autonomy to “go anywhere,” free from the tribulations that gaming companies both public and private must face. 

Savvy’s success is also not “make or break” for the PIF, which has over $600 billion in assets. This sleeve will represent a low single-digit percentage of the portfolio when fully realized, assuming the PIF grows to over $1 trillion, as is the Crown Prince’s goal, and Savvy reaches the $38 billion target. As such, it can afford to take risks, as it represents the “growthier” and more ambitious part when looking at the entire fund from top down. 

#2: What Worked and What Didn’t for Gaming Stocks in 2022

2022 was the worst year in markets since the Global Financial Crisis of 2008. While not quite as chaotic as 2020, when the VIX closed at an all-time high of 82.69 during the beginning of the pandemic, the entire year saw a sustained and mostly orderly drawdown in stocks and bonds. This resulted in the worst year for the standard 60/40 portfolio (60% SPX, 40% 10Y Treasurys) since the Great Depression. 

Good news became bad news for the stock market, as extremely tight labor market conditions and robust wage gains resulted in surging inflation and interest rates. In the U.S., the Federal Reserve raised rates from an upper bound of 0.25% at the beginning of the year to 4.50% in December. While bonds were ravaged as yields rose and spreads widened, not all sectors within equities were affected equally. Value-oriented sectors like energy, utilities, and health care outperformed as information technology, consumer discretionary, and communication services (which includes ATVI, EA, and TTWO) plunged.   

The below chart highlights the performance of global gaming stocks in 2022 versus the performance of other benchmarks. Gaming stocks include the 46 game companies that had a market capitalization exceeding $500 million as tracked by Naavik. The average performance of the gaming cohort lies in between the broad S&P 500 index and the tech-heavy Nasdaq-100 index. 

This universe includes companies from thirteen countries, though three countries make up two-thirds. These are Japan with 15 publicly listed gaming stocks above our threshold, the U.S. with eight, and South Korea with seven.  The reason why gaming performed less poorly than the broader tech sector is due to the excellent relative performance of the Japanese stock market, as the Nikkei only fell 9.7% in 2022. 

Among Japanese gaming stocks the performance was even better, rising an average of 5.1%, for reasons we outlined in the last Financial Markets update covering Capcom. But in short, a weaker yen combined with stimulus from the Bank of Japan made investments in the country much more attractive than Europe and the U.S. which had much tighter monetary policies. Inflation is also more welcomed in Japan, as the country has gone through a three-decade long deflationary episode since its economic bubble burst in 1992.

In Japan, Capcom, Nexon, and MIXI led the way, and were also the top three performing stocks in our tracked universe. Note however that some of this performance was rebounding from 2021, where the opposite dynamic was in play and Japanese tech stocks performed much more poorly. In gaming in particular, these publishers benefitted from their resilient ecosystems which saw spending continue despite consumer pressures elsewhere. In Nexon’s case for example, the company grew revenues 29% year over year as mobile revenue surged, despite mobile being one of the weakest sectors within gaming in most other regions. Furthermore, these stocks traded with the global value tailwind, as Japanese companies have some of the lowest valuations among developed markets. 

The U.S. had some of the worst performance, as the 42% average drop in the country’s eight gaming stocks more than doubled the losses of the S&P 500 and exceeded the Nasdaq-100’s loss by 9%. Only one company, Activision Blizzard, notched a positive return, which was due to its acquisition-related announcement with Microsoft last January. In general, the largest integrated gaming companies outperformed their smaller and more targeted counterparts. 

While mobile gaming outperformed in Japan, in the U.S. AppLovin, Unity, and Roblox were the worst performers, falling by 89%, 80%, and 72% respectively. Note this only includes stocks above the $500 million threshold, as companies like Skillz performed even worse with declines exceeding 90%. While AppLovin and Roblox outperformed in 2021, Unity’s decline is particularly brutal as the stock fell for a second straight year, and is now half of its September 2020 IPO price. 

AppLovin and Unity provide marketing, monetization, and analytics tools for mobile games publishers. In Unity’s case, the company also provides the toolkit necessary to create these games from the ground up. But in 2022 mobile ad-spending slid due to weaker market conditions and the full effects of Apple’s decision to kill off IDFA. On a fundamental basis, Roblox performed well, as DAUs reached records and bookings showed impressive growth. But the company was coming off its torrential IPO year in 2021, which saw valuations surge to insane levels in November, coinciding with the peak of broader equities.    

Rounding out the top three countries was South Korea, which had the second worst performance behind Singapore. The average gaming stock in the country fell -58.3%, despite the country’s benchmark KOSPI Index falling “only” -24.9%. The semiconductor industry is one of Korea’s major economic industries, and the sector faced a massive chip glut mid-year as inventories were built up during the chip shortage. This affected tech indexes and tech stocks in the country broadly, and gaming was no exception. 

There were more idiosyncratic reasons for gaming underperformance in Korea as well. For example, Krafton, which is the biggest gaming company in Korea, plunged 63% as enthusiasm for esports waned, which affected its hit game PUBG. The Indian version of PUBG Mobile, which was created due to the original game being banned in 2020, was also taken down in July 2022. Before the latest ban, Battlegrounds Mobile India had been downloaded 50.3 million times on Google Play and 2.4 million times on iOS.  

There was great dispersion among publicly listed gaming companies in 2022, which should continue for the next few years. The low interest rate period that existed after the Great Financial Crisis and briefly after the pandemic began will very likely not come back until inflation returns to a much more manageable level, meaning valuations are actually important again (hint: they never stopped being important). 

This is important as there is significant uncertainty around asset return expectations over the next five years. While broad index investing worked great when rates were low, their sharp increase in 2022 and early 2023 has led to dislocations everywhere that investors can benefit from. 

2023 is off to a much better start than 2022. Through April 7th, the average gaming company with a market cap exceeding $500 million has returned 14.7%. Interestingly, this performance seems to be led once more by larger companies, as the 12 stocks with market caps over $10 billion averaged a 19.0% return, while the nine below $1 billion averaged a return of 11.4%. Note this is utilizing market cap as of April 7th. While this performance is unlikely to continue through the entire year, 2022 set a low bar for future comparables that should make gaming companies’ financials look favorable throughout the rest of the year.    

Top Movers

• For the week ending April 7th, 2023: the average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was +1.9%. The S&P 500 returned -0.1% and the Nasdaq-100 returned -0.9%.
• Most global equity markets were closed Friday due to Good Friday. Gaming stocks outperformed for another week, led by IGG and Perfect World, two publishers targeting the Chinese market.
• IGG surged 39.4% on the week led by a 29.6% surge on Monday, the best day for the stock since 2020 and the highest volume day since 2017. Chinese gaming publisher and Valve esports collaborator Perfect World also rose 21% last week. These gains were not driven by any company-specific news.

Most Notable Strategic Investments

• Scopely, a large American publisher primarily focused on the mobile market, was acquired by Savvy Games Group for $4.9 billion. Savvy Games Group is part of Saudi Arabia’s Public Investment Fund, which has a goal of investing $38 billion in the gaming and esports sector through 2030. We covered this transaction in detail in our latest earnings update, and what it means for Savvy in the Financial Markets update above. (Link)
• Devolver Digital acquired indie games developer Doinksoft for an undisclosed amount. The studio is behind Gato Roboto, a black-and-white 2D Metroidvania platformer featured in Steam’s Black & White Indie Games Bundle. Doinksoft has worked closely with Devolver in the past, particularly on its title “Devolver Bootleg,” which features eight low-quality spinoffs of some of Devolver’s most popular games. Prior to the acquisition, the studio’s next game “Gunbrella,” an action-adventure game for multiple platforms, was slated to be published by Devolver. (Link) 
• Esports and lifestyle organization XSET has acquired Queens Gaming Collective (QGC), a community for women in gaming and esports. XSET was founded by former FaZe executives in July 2020, and currently fields rosters in numerous esports. QGC provides resources and support for women in the gaming industry, including mentorship, networking, and career development opportunities. The acquisition will allow XSET to further its mission of creating a more inclusive gaming community and promoting diversity in esports. (Link)

Most Notable Venture Financings

• Social Future, a startup from Hong Kong, has raised $6 million in a seed funding round to build an AI-driven virtual social platform. The platform aims to create a more immersive and personalized social experience for users by leveraging AI and blockchain technologies. Social Future's platform will use AI algorithms to create virtual environments that can adapt and respond to users' preferences and behavior in real-time. The company has over 100,000 active users in North America, most of which are crypto-native. (Link)
• Turkish mobile game studio Paxie games raised $3 million from VC firm Ludus Ventures. This is the second round of funding for the company, after it raised $1 million in pre-seed funding from the same VC. The studio’s two games include Merge Studio: Fashion Makeover, which is currently ranked No. 12 in the Puzzle Genre on iOS and has over 1 million downloads on Google Play, and Tile Star: Dream Makeover, a similar puzzle game. Paxie Games' CEO said the studio was still “at the beginning of [their] journey” and they would direct all their focus on producing new games. (Link)
• AI powered gaming platform Skillprint raised $3.5 million in pre-seed funding. Skillprint is based out of Oakland, California, and was founded by gaming industry veterans Chethan Ramachandran and Davin Miyoshi. The platform hosts over 40 games that users can play to build out their “Skillprint,” a model that provides insights into one’s “moods, cognitive skills, and personality traits.” (Link) 

Other News

• The Super Mario Bros. Movie was theatrically released in the U.S. on April 5th and immediately broke numerous records. The film made $205 million in its first five days of release in the U.S. & Canada, and $173 million internationally, for a worldwide total of $378 million. While the movie received mixed critical reception, with a current Rotten Tomatoes score of 56%, it was a huge success with audiences, receiving an “A” grade from CinemaScore. Records broken include the biggest opening of all time for an animated movie and the best opening weekend for a video game adaptation. This is Nintendo’s first non-Pokémon film since Gekijōban Dōbutsu no Mori, which was based on Animal Crossing and debuted exclusively in Japan in 2006. (Link) 
• Madison Square Garden Sports (NYSE: MSGS) formalized the acquisition of CLG by NRG, which it owns a majority stake in. Last week, CLG abruptly announced that it was dissolving nearly all of its esports interests, with the exception of its League of Legends roster. The team is the latest to be plagued by financial problems, which have been affecting the entire esports scene. TSM is also rumored to be facing challenges, resulting from the loss of its FTX sponsorship which would’ve generated $210 million over 10 years. (Link) 
• Discord has expanded its subscription service Nitro with a soundboard and new reactions feature. The soundboard comes with a collection of sounds that Discord users can play in voice channels. Permissioned channel owners can also upload their own sounds, as long as they are under 5 seconds long and 512 KB in size. The number of sounds scales with the number of server boosts, another Discord premium feature. The new reactions, called Super Reactions, add an animation when reacting to a message with an emoji. (Link)
• Asus unveiled a competitor to the Steam Deck called the ROG Ally. The trailer for the handheld gaming device was released on April 1st, leading many to think it was an April Fool’s joke until the company clarified otherwise. YouTuber Dave2D received an “early engineering sample” of the device and confirmed it would utilize AMD Zen 4 CPUs and RDNA 3 graphics. The manufacturer claims that the ROG Ally would be capable of double the performance of the rival Steam Deck. (Link)
• Nintendo and DeNA officially established their Nintendo Systems joint venture, after first announcing it last November. Details about the JV’s goal remain opaque, aside from last year’s press release which stated it would “strengthen the digitalization of Nintendo’s business,” primarily through users’ Nintendo Accounts. Nintendo Systems is a subsidiary of Nintendo, as the company contributed 80% of its capital. (Link)

A big thanks to Mario Stefanidis, CFA for writing this update! If Naavik can be of help as you build or fund games, please reach out.