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As we enter the second half of 2024, we decided it was a good time to pause and assess: How is the games market performing overall, and how does it stack up alongside the broader financial market landscape?

Let’s start with public markets. If we look at the Solactive Video Games & Esports Index, it has returned a respectable 6.1% in the first half of 2024. However, it’s dramatically underperforming versus other major indices, which have been spurred on by the mega-cap tech companies that are beginning to make their marks in AI.

The S&P 500 returned 14.5%, the tech-heavy Nasdaq-100 is up 17%, and even the more international MSCI World Index is up 10.9%. The gap between these results hasn’t changed much in July either. If we look even closer at the Solactive Video Games & Esports Index’s constituents in 2024 so far, more than half of the 48 companies posted negative returns and 34 posted double-digit performance in either direction. So it has been more volatile and companies have performed poorer than may initially meet the eye. Record layoffs this year also portray an industry that’s been resetting rather than thriving.

Now, this is an incredible first half for the major indices compared to historic norms, but it still begs the question of why gaming is underperforming and how much that really matters.

Obviously, the game industry is still grappling with evolving consumer behaviors in the post-pandemic era. Time spent gaming has largely reverted to pre-pandemic levels and, as a whole, costs have risen faster than revenues. Plus, Apple’s ATT policies remain tough to grapple with, there are challenging year-over-year comparables in the AAA market, and hardware sales have slowed since there are no new consoles.

Apart from ShiftUp in Korea, it’s also been a while since the public market was infused with new, high quality gaming companies, and our industry’s major firms haven’t kept up with the hype and innovation of the mega-cap tech companies riding the AI hype wave this year.

We’ll take a look at the public market’s biggest winners and losers so far this year below, but let’s quickly touch on private markets before we do so.

Private market activity around gaming has flatlined. According to data from Konvoy, the latest quarter saw just $492M in new money allocated to private market gaming companies, the second lowest since the pandemic. While early stage funding remains relatively solid, there was virtually no funding into growth or late stage startups.

Konvoy notes that 90% of all funding right now is flowing to early stage companies, versus 80-85% historically. Also, valuations from Pre-Seed to Series A are down by 30-70% versus where they were 18 months ago, during the salad days of private markets.

There are a lot of factors at play here:

• Many teams that raised funding rounds 2-3 years ago are having to grapple with lower valuations (stemming from public markets). Valuations from Pre-Seed to Series A are down by 30-70% versus where they were 18 months ago, which makes setting terms for new rounds more challenging.
• There have been fewer major exits – via M&A and IPOs – and the lower liquidity makes it harder for many investors to justify writing larger checks.
• Many investment teams themselves have struggled to raise as much capital from LPs as hoped, and many of them have been in between funds in recent months.
• The games industry also simply isn’t as much of a growth market as it used to be – or many investors believed it to be.
• Private markets move in hype cycles, and currently AI is sucking up a lot of attention, likely at the expense of other companies in and around gaming.

What’s worth noting is that while financial markets will always continue to fluctuate, the level of activity we saw 2-3 years ago never should have been viewed as the new normal. What we see today, especially in early stage markets, is likely more sustainable, even if the revolving door of who can raise and deploy capital continues to be a tough game.

Lastly, if we take a look at actual sales (and dial in on the US for a moment), spend on video game content rose 6% year-over-year, but hardware growth declined a precipitous -30%. What’s interesting is that mobile, a headwind since mid-2021 (when Apple started enforcing ATT), appears to have found its footing and may be a positive contributor once more. As for hardware, the rest of 2024 will likely stay at this lower level, but once Switch 2 will presumably release mid-2025, hardware as a market driver should accelerate again, even if the number of console gamers remains steady moving forward.

There are many more ways to slice and dice the industry in its entirety, but in reality every companies’ own fate is largely in its own hands, and results are widely diverging. So let’s take a look at the three winners and losers in public markets so far this year.

Winners

AppLovin(NASDAQ: APP, +99% YTD): The top gainer in the index in absolute terms, AppLovin has delivered exceptional performance so far this year, following a gut-wrenching 90% drawdown between November 2021 and December 2022.

AppLovin is a leading mobile adtech player, having proven to be nimble in recent years as it has won meaningful share from competitors like Unity. It has seen investor enthusiasm over its new AI-based advertising engine, Axon 2.0, and as we noted in our recent breakdown, AppLovin facilitates over $4B of mobile advertising annually, a figure second to only Google and Meta.

If we look at the latest quarter, revenue was up 48% year-over-year. Two-thirds of that revenue stems from the company’s software platform, which has seen revenue growth accelerate to 91%. And that larger business has also led to expanding margins and cash flows, not to mention cash left over to reduce the company’s share count by over 10% in the past year. Business is clearly booming – and if we layer on a gradually rebounding mobile market, potential regulatory changes, and a solid founder-led leadership team, AppLovin appears to be in good shape.

Keywords Studios (LON: KWS, +43% YTD): Keywords Studios is a leading localization and third-party services company for the game industry. The company has over 12,000 employees, making it one of the largest gaming companies in the world by headcount. KWS stock has been challenged in recent years: profitability has been hampered due to wage inflation for its massive labor force, a weakening AAA games environment which has led to fewer partnerships, and questionable capital allocation around parts of its M&A strategy. Coupled with the looming fear of GenAI potentially displacing many of its localization and creative services, the stock was down -65% from its highs in 2021 through April 2024. 

However, in May reports emerged that Swedish private equity giant EQT was in advanced talks to buy out KWS for £25.50 per share, more than double the £11-12 range shares were trading prior. The deal was finalized on July 3rd, and KWS is set to be taken private subject to regulatory approvals.

We recently covered the deal in the context of private equity’s rising interest in gaming-related software and services. It’s good to see a new type of investor provide additional exit opportunities for companies in our industry, showing there’s upside in the market, and this can hopefully play a role in leveling up these businesses over time.

CD Projekt SA (WSE: CDR, +38% YTD): After the well-publicized Cyberpunk 2077 debacle of December 2020, Witcher developer CD Projekt has spent much of the last few years on getting the title up to scratch.

The company finally turned a page with its September 2023 Phantom Liberty expansion, the first and only paid DLC for Cyberpunk. Expectations were for the DLC to sell well but not to garner critical acclaim, given the state of the base game at launch less than three years prior. However, the expansion was a hit and sold 5M units through the end of 2023, representing a high 20% attach rate. 

At $30 per copy, this success gave the Polish company a jolt of sales and profits which will help the team to work on a new Witcher trilogy, slated to release over a six-year period beginning in 2025. Optimism over this tight release window has resulted from the studio’s switch from REDengine to Unreal Engine 5, which should, in the studio’s own words, “make the process of game creation more efficient” and “facilitate recruitment to the studio’s development teams.” It is fair to be skeptical of that timeline, but we shall see.

Even though CD Projekt’s stock has performed well this year, it remains nearly two-thirds below its 2020 peak in Q4 2020, when Cyberpunk 2077 was about to release. There’s still a lot of room to catch up and impress investors again.

Losers

Stillfront Group (STO: SF, -27% YTD): Sweden has no shortage of video game holding companies. Like its peers Embracer Group and Enad Global 7, Stillfront has underperformed dramatically in recent years, as its acquisition strategy has faltered amidst high interest rates, financial leverage, and underperformance among its active portfolio. Stillfront’s franchises include Supremacy, Empire, Big Farm, Jawaker, and Albion Online, among many others. 

While many of its mobile games rely on intensive live ops, recent sales have been lackluster, and the company has resorted to boosting profitability by cutting its product investments, potentially comprising future organic top-line performance. MAUs in the active portfolio have fallen from 58M to 47.1M between 2Q23 and 2Q24, and financial performance has been poor. Bookings fell -4% year-over-year as of the latest quarter, and EBITDA fell -7%, despite company-wide cost cutting. 

It’s also a concern that when user acquisition costs were a record high 32% of bookings in 4Q23, active users registered a quarterly decline. The company’s newest title, Sunshine Island, has seen UA spend decrease by -40% QoQ; while Stillfront points out that bookings still grew by 10%, it’s hard to imagine continued double digit top-line growth given the competitiveness of the mobile games market and the challenges around targeting. 

Ubisoft Entertainment (EPA: UBI, -18% YTD): Despite strong performance from its back catalog and a compelling pipeline that includes Assassin's Creed: Shadows and Star Wars: Outlaws, concerns are beginning to loom over these releases.

Specifically, they face pushback from gamers over high pre-order prices and perceived political messaging. The market also seems somewhat fatigued with Ubisoft's open-world RPG formula, adding to the uncertainty. They should still lead to notable near-term growth, though, and ultimately the quality of the games will determine sales success.

Adding fuel to the fire, Rainbow Six Mobile and The Division Resurgence have been delayed into late 2025, and are potentially facing cancellation. On an encouraging note, Ubisoft’s newest GaaS shooter XDefiant, which released this May, outperformed expectations by accumulating 10M players in its first two weeks. Breaking into the shooter market is incredibly tough, so we’ll see how trends hold in the coming months.

Longer term, Ubisoft faces structural challenges stemming from a bloated business whose headcount does not match its performance. While the company reduced its employee count by 1,700 between 2022 and the most recent quarter, headcount is still over 19,000 with a market cap of €2.4B (~$2.6B). For comparison, EA has around 14,000 employees with a market cap of $40B – 15x higher.

Successful game launches are obviously critical to any turnaround, but as we discussed last year, taking more aggressive action to streamline the business is what would unlock the most value and set Ubisoft in a more positive direction.

Unity (NYSE: U, -58% YTD): Unity’s struggles have continued into 2024, and its painful turnaround has been underway for more than a year. In May, the company appointed a new CEO, Matthew Bromberg, seven months after John Riccitiello stepped down in the wake of Unity’s Runtime Fee debacle. 

The loss of goodwill among its customers has led to a tangible hit in financial performance, and Unity is likely to continue ceding share as the company tightens its bottom line to shore up profitability for its shareholders.

We’ll spare you more details here, since you can read much more about Unity’s current situation in last week’s issue.

What’s Next?

The rest of the year should see content sales remain steady, hardware sales stay diminished, and mobile should continue its slow crawl back to growth. While trends like web3 and the metaverse have rolled through the hype cycle, excitement remains regarding all things AI. Expect both public and private markets to continue paying more attention to this technological trend in the coming months.

We’ll also learn more about the viability of gaming subscription services; In particular with the addition of Activision Blizzard’s games to Xbox Game Pass, and especially the day one launch of Call of Duty: Black Ops 6 in October. It will be fascinating to see the impact on subscriptions versus $70 unit sales – the result will likely help shape Xbox’s forward-looking strategy, which could impact on the entire console market’s next generation.

As for financial markets, many companies, employees, and investors may still feel the impact of ongoing resets in business expectations, which continue to affect the game timelines, the necessity of layoffs, and beyond. As such, most notable gaming stocks remain well below their 2021 highs.

Connected to this, the IPO outlook for 2025 remains uncertain. Discord’s last funding round was its Series I in November 2022, co-led by Stella Capital and Atlas Capital. While neither the valuation nor the check size were made public, the valuation today for the popular communication platform is likely lower.

Similarly, Epic Games raised $1.5B in February from Disney, giving the entertainment giant a 9% stake in the Fortnite developer. This round valued Epic at $22.5B, 29% lower than its $31.5B valuation in April 2022, when it raised money from Sony and Kirkbi. These companies, alongside other prospects like HoYoverse in China, are likely inching toward public market debuts, but finding the right market conditions to be best set up for success remains challenging. 

Naturally these challenges trickle down into the rest of private markets too, and while there are plenty of incredible companies and founders to be excited by, we don’t yet see the makings of a major private market recovery.

However, once interest rates start decreasing, companies move beyond their difficult reset periods, valuations become more normalized between rounds, and larger M&A and IPO actions start picking up momentum, we’ll likely see an uptick in late-stage venture, which would be healthy for the entire ecosystem.

The end-to-end financial cycles take years to unfold, but it will always be exciting to see which companies can make the most of the moment and excel no matter what’s going on in the market, and which can’t. We’ll be back with additional recaps in the future to unpack the next winners and losers.

A Word from Our Sponsor: LIGHTSPEED GAMING

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With its dedicated gaming practice, Lightspeed Gaming, the firm invests from an over $6.5B pool of early and growth-stage capital – by far the largest set of funds in the sector. Lightspeed's team combines deep gaming, consumer, and enterprise technology expertise with a global multistage investment platform and a culture that truly puts founders first.

Focus areas are game studios (PC, console, mobile), interactive media platforms (social, UGC, distribution, streaming), and related technologies (AI/ML, 3D, engines, game development, AR/VR).

Selected investments include Epic Games, Inworld AI, Gardens, and The Believer Company – as well as designers and producers who led the creation of titles like Fortnite, Call of Duty, League of Legends, Wild Rift, Apex Legends, Overwatch, Valorant, StarCraft II, and Warcraft III.

In Other News

💸 Funding & Acquisitions:

• Freestyle Chess debuts with $12M in funding for tournament series
• Moon Rover nets $3.5 million from NCSoft to develop emergent FPS
• Look North World raises $2.25M for its Fortnite UGC games and creator label
• Dotplay raises $1M for web-based mobile game tech platform

📊 Business & Products:

• Microsoft reports Xbox’s revenue is up 61% in Q4 FY24 thanks to Activision
• Electronic Arts Reports Q1 FY25 Results
• Paradox Interactive profits drop 90% due to Life By You cancellation
• Net sales down at Capcom, but company on track to meet financial targets
• Epic removes Fortnite from mobile app stores to prepare for own store launch
• My.Games divests creator platform allegedly used to violate Russia sanctions

👾 Miscellaneous:

• US Senate passes online child safety bills
• EA Sports College Football draws over 5 million players at debut
• SAG-AFTRA talent union calls for strike against game companies over AI
• Steam is getting some big upgrades for game demos
• The Olympics has moved on from Mario and Sonic

Content Worth Consuming

Matchmaking Series: The Role of Skill in Matchmaking (Activision). “Call of Duty matchmaking is a complex and multifaceted domain. On April 4, 2024, we released the first in a series of white papers exploring the impact and prioritization of ping in matchmaking. In this document, we will discuss the topic of skill in core multiplayer matchmaking, its implementation, and how we have observed positive results from the fine tuning of skill in the matchmaking algorithm used by Call of Duty.”

An Interview with Award-Winning Game Director | Kyle Rowley(a16z Games). “In this episode of Win Conditions we sit down with Kyle Rowley, Game Director of Alan Wake 2. I wanted to learn more about Kyle beyond just his work on Alan Wake. How does one go from a fan of Max Payne to working on other titles like Runescape and Cyberpunk? How does one sustain a 20-year career in a game dev, an industry notorious for its ups and downs?”

Wipeout 2097: The Making of an Iconic PlayStation Soundtrack(Noclip). “We explore the creation of one of gaming's most iconic soundtracks by talking to Psygnosis composer Tim "CoLD SToRAGE" Wright about a very special era of ‘90s games development.”

Revealing the theoretical basis of gamification (ScienceDirect). “We derived basic principles that help explain how gamification works: Gamification can illustrate goals and their relevance, nudge users through guided paths, give users immediate feedback, reinforce good performance and simplify content to manageable tasks.”

Our Game Design Consulting Services

Today we’re highlighting our full lifecycle design services. This includes customised game deconstructions, core/metagame concepting, feature design, economy modeling, gameplay balancing, monetisation design, and much more across platforms and genres. Here is what one of our clients had to say.

If you’d like to learn more, reach out here! Also check out our expanded consulting service portfolio here.