From Ubisoft to HelloFresh: the lockdown winners that still have potential to rise in the stock market

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The coronavirus has left a number of trends that are here to stay in the markets with the acceleration in leisure and consumer spending.

Online shopping is a prime example, and so are some of the other “lockdown winners”: computer games and meal kits.

In this sense, Luke Biermann and Hannah Piper, European equity managers at Schroders, have prepared a report to which Business Insider Spain has had exclusive access, in which they highlight the investment opportunities in this field. That is, how these trends are here to stay and to grow after the pandemic.

“In addition, we believe that smaller companies are the best way to access the investment opportunities they provide,” they pointed out.

Computer games continue to evolve very rapidly. The pace of change over the last 40 years has been incredible and innovation continues. In the minds of some investors, video games are associated with lockdown, but that ignores the huge structural growth potential that the sector has.

In recent years, the reality is that it has seen a huge number of people take up video games.

Statista data shows that the number of gamers worldwide has increased from around 2 billion in 2015 and, is forecast to exceed 3 billion by 2023.

“We’ve seen video games evolve to become as social as the game itself,” comment Biermann and Piper. MMO (Massively Multiplayer Online) games allow a large number of players to participate, creating a sense of community in the game. “In addition, they leverage a sense of storytelling to keep players interested,” these experts added.

Also, there are continuous innovations in e-sports and virtual reality. E-sports have grown in popularity not only in terms of participants but also in attracting a fan base that attends tournaments in real life and watches them online.

Companies best positioned to continue to benefit from the growing trend in demand for video games

There are several European companies that are at the forefront of these developments, as noted in the report. “Assassin’s Creed creator Ubisoft Entertainment is perhaps the best known, although for investors in smaller companies there is a wide range to choose from — Embracer, Stillfront, Team17 and Nacon are also European developers of popular titles,” Biermann and Piper said.

Meanwhile, Sweden, in particular, remains a leader in video game development. “Popular games such as Minecraft and Candy Crush were developed in Sweden; the industry association Dataspelsbranschen claims that one in eight people worldwide has played a game made in Sweden,” they noted.

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“Last year’s bidding war between Electronic Arts and Take-Two Interactive for UK-based Codemasters illustrates how small European companies have unique capabilities that are attractive to large US game developers,” analyzed the experts at the UK manager.

In this regard, they point out that from an investment point of view, the potential for monetizing the popularity of video games is very interesting. “Prices have largely held up in recent years, but that is starting to change, with many games being downloaded for free and relying on in-game purchases for revenue,” they continued.

“Even the purchase of a physical game, which is around €50, compares favorably with other types of entertainment, given the amount of time generally spent completing a game,” the Schroders managers noted.

The gaming sector is not without risk

However, there are risks that investors need to be aware of. The industry’s rising profile means that a game launch that goes wrong will become apparent. Late last year, Sony pulled the highly anticipated Cyberpunk 2077 from its store following user complaints about glitches and, Microsoft also offered refunds. “The game’s developer, CD Project Red, which has traditionally focused on the PC gaming market, had to patch the game for consoles,” the experts highlighted. Investors should be aware of these risks, in their view.

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“You need to carefully analyze a company’s expertise in different gaming segments (PC, console, mobile)… Spreading investments across several companies can be one way to try to manage risk,” they specify.

“There is also an opportunity to invest in outsourcing companies that provide quality assurance, testing, and translation services for computer game developers,” Biermann and Piper pointed out.

Health awareness drives meal kit trend: HelloFresh, head and shoulders above the rest

Another lockdown success story has been the delivery of make-at-home meal kits. Lockdown and telecommuting are causing people to prepare more of their own food and many are bored with cooking. Meal kits have proven to be a popular solution and are another habit that we believe will endure in the wake of lockdown.

Market leader HelloFresh had 5 million active customers in the third quarter of 2020 who ordered 162 million meals, these experts say. This compares with 2.6 million active customers and 68.9 million meals in the same period of 2019.

“With much of Europe still imposing some lockdown measures and mobility restrictions, many of us are eager to get back out to restaurants when we can, but that wouldn’t necessarily mean replacing meal kits,” argued Biermann and Piper.

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Before the pandemic, these kits were already popular with time-strapped, health-conscious consumers. The meal kits provide fresh ingredients and recipes tailored to a specific number of people. “This appeals to a customer base that is aware of the importance of fresh food in terms of health, as well as the environmental impact of food waste,” they expound.

“The pandemic, with its restaurant closures and supermarket queues, led many people to discover meal kits for the first time. However, in our view, the growth potential is considerable,” explained the Schroders managers.

At the moment, the market is mainly aimed at dinners, but there is scope to move into lunches, breakfasts, and snacks, as they say in the report. There is also the convenience food market to consider, which HelloFresh recently entered in the U.S. with the purchase of Factor75.

Indeed, while the pandemic has led to strong growth in food e-commerce, this growth has come from very low levels and still lags far behind other categories, such as apparel. “In our view, the growth potential is significant,” they added.

“The key for us as investors is to find the companies that can grow and make profits, rather than just chasing volumes, and again, careful analysis is needed to find the winning companies,” they said.

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