life. money. probability.
JULY 2019
ELECTRONIC GAMING &
ESPORTS 450M fans
$1B
revenue
PLUS
Epic’s Fortnite Google’s Stadia Beyond Meat Million-Dollar Side Hustle Zillow: Flippin Lucky
July 2019
Fans watch the action at the Mid Season Invitational of League of Legends’ 2015 Season in Tallahassee, FL.
2
15 The Top 10 Gaming Stocks
In 2018, the top 25 publicly traded game companies earned more than $100 billion.
16 Follow the Money
Financiers, entertainers & professional athletes are investing heavily in esports.
18 Esports’ Growing Audience & Valuations
22 The Next Generation of Gamers
21 Young Money
24 Fortnite: An Epic Blockbuster
Million-dollar prize pools, NBA-like valuations & the next 1 billion players.
With esports prize pools in the millions, where does the money flow?
In a few short years, high school esports has grown into a national movement.
The world’s most popular game has more than 250 million users and a $15 billion valuation.
26 Google’s Got Game Stadia, the company’s new cloud-based venture, looks to take down the gaming console.
28 Glu Mobile: Boom and Bust Cycle Continues
Analysts identify an overpriced mobile gaming company; plus a look at short-selling opportunities.
PHOTOGRAPH BY MARV WATSON
12 The Business of Electronic Gaming & Esports
luckbox | july 2019
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Modern
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editor-in-chief ed mckinley managing editor yesenia duran technical editor mike rechenthin features editor tom preston contributing editors vonetta logan, wolf richter creative director jacqueline cantu From side hustle to swimming in sales.
P. 36
trades
tactics
life, luxury & the pursuit of happiness
actionable trading ideas
essential trading strategies
BASIC
GAME THEORY
30 Esports Sensei
LIGHT THIS CANDLE
47 TTWO: Take-Two Transactions
THE NORMAL DEVIATE
32 Sports Wagering on the Money Line WELLNESS
34 Beyond Beyond Meat
SOMETHING VENTURED
ARTS & MEDIA
36 Million-Dollar Side Hustle
THE TECHNICIAN
48 Three Gaming Stocks with Personality
38 Books, Movies & Podcasts Reviews
51 Metals Detector
FINANCIAL FITNESS
POKER TRADE
CHERRY PICKS 56 Down Market Options
TRADING PIT
42 Four Tips to Winning Poker 44 Meet Adam Mesh CALENDAR
45 Rough Sailing in July 4
60 Pairs Trading ADVANCED
62 No-Choke Collars
editorial director jeff joseph submit a story idea tips@luckboxmagazine.com comments & critiques feedback@luckboxmagazine.com request contributor’s guidelines, submit press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service service@luckboxmagazine.com
LUCKBOX OF THE MONTH
64 Zillow is Flippin’ Lucky and so are its Shareholders
media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com luckbox magazine is published at 19 n. sangamon, chicago, IL. 60607. editorial offices: 855.468.2789
DO DILIGENCE
54 Stocking up on Gaming Stocks
41 Zelda Teaches Trading
INTERMEDIATE
MACRO TRADER
50 Unresolved Macro Themes & Volatility FUTURES
58 Theta: Money for Nothing
contributing producers adrienne applegate, jessica mcdermott
On the cover: SK Telecom T1 K stormed to victory over Royal Club in the 2013 Season 3 League of Legends World Final at the Staples Center in Los Angeles. Photograph by Marv Watson
printed at Lane Press www.luckboxmagazine.com luckbox magazine @luckboxmag
luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!
PHOTOGRAPH COURTESY OF MINNIDIP
trends
contributing art director cassie scroggins
tas na ass
©c pro
luckbox | july 2019
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*The Small Exchange, Inc. (“Small Exchange”) led an application with the Commodity Futures Trading Commission (“CFTC”) seeking designation as a contract market (a “DCM”). This application has not been approved by the CFTC, and there is no guarantee that the CFTC will approve the Small Exchange’s application to be a DCM. The launch of Small Exchange is contingent upon approval from the CFTC. tastytrade is an investor in the Small Exchange. tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give tas nancial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly-owned subsidiary of tastytrade. tastytrade is a trademark/servicemark owned by tastytrade. © copyright 2013 – 2019 tastytrade, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for proot, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.
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DON’T LOOK AWAY— GAMING & ESPORTS HERE TO STAY
thinking inside the luckbox
luckbox is dedicated to helping hard-working, proactive readers achieve results just as positive as the good fortune that befalls talentless, lazy luckboxes whose outlier outcomes outstrip their skills. how? it’s all here in the luckbox manifesto.
the luckbox soapbox
Take me out to the market Take me out for a trade. Let’s sell some straddles the luckbox way, We can make money from time decay… You’ve read about it in every issue of luckbox: We’re big fans of volatility. It provides opportunities for proactive investors—particularly options traders— regardless of the direction of the overall markets. It’s a message echoed in sports. When you’re in a race, it’s good to have the wind at your back—and to know it will be blowing strong for a good long while. While we call out the futility of predictions (for the wind, the market or otherwise), we certainly have respect for trends. Once they catch our eye we can’t look away. In fact, the bigger the trend, the more we respect it and the sooner it becomes a fixation. Technological advances have accelerated the incubation time of market trends. It’s not that long ago that the internet, mobile communications, online retailing, streaming media, cybersecurity, robotics and automation, and cannabis were only fledgling investment ideas. We’re not surprised that sports, entertainment and games—particularly the electronic versions—would converge and then emerge as a new megatrend. We look at trends the way Gretsky looked at hockey pucks. So, we have to take note when Meg Whitman and Jennifer Lopez suddenly have a common investment thesis, Goldman Sachs estimates that esports and online game streaming viewership will surpass the audience for Major League Baseball to reach 300 million people by 2022, and teenagers
1 tune out the noise and
false prophets in the investment world
2 understanding probability is
the key to improving outcomes in the markets and in life
are earning up to $15,000 an hour to stream their live video gaming play to millions of global fans. The May edition of luckbox lauded the likes of Disney in our Big Media issue, and we noted that Hollywood was setting new records, earning more than $41.7 billion in box office revenue and breaking the 40 billion-dollar mark for only the second time in history. Yet, even with its historic year, the film industry just can’t keep up with electronic gaming. Video gaming revenue increased 18% from the previous year to reach $43.8 billion in 2018. The American Time Use Survey from the U.S. Department of Labor indicates that people are spending more time playing video games than watching TV. In this issue we appraise the ongoing growth of video gaming and the emergence of a new entertainment category—esports. We look at the business of esports from the perspectives of the audience, the athletes and the investors, to sharpen understanding of the companies most likely to monetize what appears to be the fastest-growing entertainment phenomenon in history. Game on. Tom Preston features editor
“Nothing is as obnoxious as other people’s luck.” 6
3 stock-picking is a low-
probability investment strategy
4 hot investment themes,
sectors and stocks matter only because they tend to produce greater volatility
5 greater volatility =
greater opportunity
6 options are the best vehicle to
manage market risk & exploit market volatility
7 whatever you’re doing
with your money now— you can do better
8 luckbox can help you do
better—much better
9 learn your options—luck
smiles upon the prepared
10 so, get off your ath—
let’s do some math!
don’t rely on luck, get luckbox
Jeff Joseph editorial director
― F. Scott Fitzgerald
luckbox | july 2019
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Open Outcry I would like to deploy a strategy of doing short-term calendar trades on the SPX. The recent Advanced Tactics article, The Mullet Trade, talked about low volatility (VIX) as the best environment. Would a VIX below 20 be a good environment for calendars? And, if so, would a butterfly be a good strategy when the VIX is over 20? —Robert Gregor, Raleigh, NC Robert, the source of that article, Michael Gough, a research analyst at tastytrade, had this reply:
The 10-year median VIX is 16, so I would look to trade calendars on SPX when VIX is below that. One way to capture high implied volatility is with broken-wing butterflies, which have asymmetric wing widths. BWBs are done for a credit, which greatly improves their probability of success because you can be directionally wrong and still make money. Look to trade a broken wing butterfly when implied volatility is high, and try to collect a credit on the trade, which improves the probability of profit. In this example I’m using SPY instead of SPX. Depending on one’s outlook on the market, an investor can trade either a put or call butterfly. In this example, a call butterfly is used because if the market increases, the investor will be correct directionally and volatility will contract. This assumes the June monthly expiration, which has 28 days to expiration. One trade idea is the +1 287 Call, -2 289 Calls, +1 294 Call. The current price is a $0.35 credit. Max profit would occur if the underlying closes right around 289 at expiration and the investor collect $235. Because the trade is initiated for a credit, there is no risk if SPY sells off. Losses would begin to occur if SPY moves beyond $291.35. Happy trading! —Michael Gough
Please email suggestions, criticism and commentary to feedback@luckboxmagazine.com.
The article in the April issue about Tom Sosnoff (tastytrade co-CEO) was great. Big thumbs up on the specific options trading concepts in the past few issues. The analysis of Disney versus Netflix was in-depth and very thought-provoking. But, too much coverage of poker—why do I care about that? —Jeff Lick Raleigh, NC
Comment on this issue by visiting luckboxmagazine .com/survey
luckbox is all about preparedness and probabilities, so the editors see parallels between proper options trading and advanced poker play. In short, trading is more than liking a stock, in the same way that competitive poker is about much more than liking your hand. And, truth be told—the staff loves poker!
I love the detail and analysis. Futures trading is the next focus of my personal education, so I would like to understand the trading of that better. Maybe you could publish a series on futures for beginners. —Brian Allen Arcata. CA Stay tuned. The October issue of luckbox will focus on Futures. Take our reader survey. We may publish your comments!
july 2019 | luckbox
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SHORT INTEREST
“A pattern of persistent or recurrent gaming behavior … of sufficient severity to result in significant impairment in personal, family, social, educational, occupational or other important areas of functioning.” “Gaming Disorder” was included in the eleventh edition of the International Classification of Diseases (ICD) published last year. The disorder is considered a serious health condition by the 194 World Health Organization (WHO) members who met to revise the classifications. The diagnostic manual was last updated in 1990. The WHO now categorizes gaming disorder as an addiction that rivals drug abuse, despite the fact no substance is consumed. luckbox questions whether players can truly be addicted to games (an activity) in the same way they’re addicted to substances. And even if they can, how did the WHO come to recognize compulsive gaming as an illness before conferring similar status upon addiction to pornography, hoarding, smartphones or social media? And for that matter, isn’t obsessive-compulsive behavior already a recognized disorder? Insurance companies use ICD categories to settle claims, and a disorder with a diagnosis code becomes more likely to qualify for coverage. Besides contributing to escalating health insurance premiums, the WHO’s action does little more than provide teenagers with a newly sanctioned excuse to play hooky.
Esports Economics “The biggest channel is advertising and sponsorship, the latter of which forms the majority of money flooding into esports, which totaled $337 million in 2018, according to Newzoo (and is predicted to climb to $460 million in 2019). Contracts for esports team sponsorships range from about $100,000 to $3 million per year. And who’s investing? Gaming companies like Red Bull, Logitech, Corsair and Intel appear in Twitch commercials during esports broadcasts, on stage at tournaments and all over players’ merchandise. These tournaments supposedly pull in hundreds of thousands of engaged viewers who, advertisers hope, might go on to buy a $2,000 gaming PC or a Red Bull from the checkout line mini-fridge at Best Buy.”
—Shady Numbers and Bad Business, Cecilla D’Anastasio, Kotaku, May 2019
“Esports will be the biggest sport in the world, much bigger than anything else. Even bigger than soccer.” —Bracken Darrell, CEO of hardware company Logitech, September 2018
8
luckbox | july 2019
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“We compete with (and lose to) Fortnite more than HBO.” —Netflix CEO Reed Hastings, in the annual letter to shareholders, January 2019
“Esports will rival the biggest traditional sports leagues in terms of future opportunities.” —Steve Bornstein, former CEO of ESPN and the NFL Network, who’s now chairman of Activision Blizzard Esports Division, October 2015
WHAT IS THIS THYNG? Scan this page for additional content!
THYNG, an augmented reality app, links luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on your device.
1 Download the free THYNG app
2
“That (Fortnite) game shouldn’t be allowed. Where is the benefit of having it in your household? It’s created to addict, an addiction to keep you in front of a computer for as long as possible. It’s so irresponsible.” —Prince Harry to BBC News, April 2019
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Select the “Targets” mode, scan any luckbox page that contains the THYNG icon
3 Watch the page come to life with enhanced content!
6/7/19 11:12 AM
FAKE FINANCIAL NEWS
IPOs Aren’t For Real By Vonetta Logan
I
Fake IPOs Scrappy entrepreneurs taking their companies public to raise capital, and average investors getting in on the ground floor, hasn’t happened in many moons. But who wants to read about venture capital and private investment funds liquidating their shares and painting the top of the market? In a report published last year titled, “What is the point of the equity market?” Duncan Lamont, head of research and analytics for Schroders, explains that the number of U.S.listed companies has, “shrunk by around half over the past 20 years.” And that, “financing needs can be met more cheaply and easily by other sources, without much of the baggage
10
Not only are the markets liquid, but they’re transparent, and the market doesn’t even bat an eye to mark down the price of a formerly high-flying unicorn
that comes with public Traders and listing.” Is there a dating company market that also comes executives gather without baggage? in May for the Uber Technologies IPO Asking for a friend. Ah sweet, free and easy on the trading floor of the New York cash flow. Remember, Stock Exchange. interest rates hovered near zero for a long time and a lot of large venture capital and private equity firms were making it rain like it was a Drake video. A guy just raised $1.6 million for water in a can called “Liquid
PHOTOGRAPH: REUTERS/BRENDAN MCDERMID
POs (initial public offerings) are back, baby! Here at luckbox, the editors are partying like it’s the dot com bubble of 1999. To borrow a line from the seminal film The Social Network, the story of Facebook (FB) evolving from dorm-room-based stalking site to global threat to democracy, co-creator of Napster (NAPS) Sean Parker supposedly tells a young Mark Zuckerburg, “A million dollars isn’t cool. You know what’s cool? A billion dollars!” Except in this current class of IPOs it’s more like, “Losing a million dollars isn’t cool. You know what’s cool? Losing a billion dollars, but then deciding to go public anyway.” OK, that’s not as catchy, but that’s what’s happening with the latest stable of unicorns—those private companies worth a billion dollars or more. Why can’t these pretty ponies hit their stride? Grab any high school textbook ... do high schools still use textbooks? Anyway, grab any tablet/e-reader/textbook and it will probably define IPOs as companies raising capital by offering their first shares of stock to momand-pop investors who are hungry for a real piece of some grade-A capitalist pie. “Tale as old as time, true as it can be, investors all get fleeeeeeced.” No Beauty and the Beast fans?
luckbox | july 2019
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ILLUSTRATIONS: DYLAN BRENNAN
Death.” What a time to be alive! Our public equity markets are priced to perfection, and individual investors are trading in the most liquid and efficient markets ever. Not only are the markets liquid, but they’re transparent, and the market doesn’t even bat an eye to mark down the price of a formerly high-flying unicorn. Y’all remember when Snapchat (SNAP) went public at $24 a share, then Kylie Jenner snapped her fingers like Thanos and now Snap is worth half that? Uber’s market cap is also now trading at half of what Morgan Stanley told accredited investors Uber was worth. Morgan Stanley collected $40 million in fees and was in a nowin situation if they had priced it lower, but don’t get mad when the devil lies to you. Who can blame private companies for wanting to remain in the sweet embrace of the ample bosom that is the debt market? “You guys aren’t profitable yet? Sure, here’s a check for 10 times revenue...get outta here ya scamps!” IPOs as ATMs From Barron’s: “The IPO market … provides a way for private investors to monetize investments—that is to cash out their profits.” The shift has also meant that the IPO process produces a windfall for some employees who, “have been granted shares or options as compensation and want to cash out.” So, if you’re keeping score, it’s a win for private equity, it’s a win for the newly minted tech millionaires and it’s a big fat loss for regular retail investors. That was fun. Let’s play two! Lamont writes, “Given that growth is generally most rapid in those earlier years, it is highly likely that public market investors are missing out on returns as a result.” Well, this is sucky. luckbox wanted to party like it was 1999 … had Dr. Martens and a choker necklace picked out. Well, the good news is that a tighter timeline for the availability of listed options on publicly traded underlyings means even more opportunities for retail investors. This year has seen an increase in the number of companies coming to market, and that means more two-sided action for investors. So fitting in with the gaming theme of this month’s issue of luckbox, the editors invite readers to choose a fighter!
RAISING CAPITAL OR CASHING IN? These three recent hot IPOs all have listed options and decent volume. Who ya got in Battle Royale?
Uber Technologies
Beyond Meat
(UBER) IPO: May 2019 Current Market Cap: $67 billion
(PINS) IPO: April 2019 Current Market Cap: $14 billion
(BYND) IPO: May 2019 Current Market Cap: $5.5 billion
Strengths Everybody and they momma uses it. Had the third-highest market valuation for an IPO behind Facebook and Alibaba (BABA). Competitive pricing makes it almost as cheap as taking public transportation.
Strengths Successful IPO. Visual content format is an advertisers wet dream. Steadily growing its MAUs (monthly active users) for an established platform.
Strengths Holds the title of Most Successful IPO of the Year. Triple-digit growth over IPO price. Instant “feel good” factor knowing its products aren’t killing the planet.
Weaknesses Consistently burns through a billion dollars in a quarter. Stock lost money on IPO day. Angry investors claimed Morgan Stanley lied to them (lol). Threatening to replace all of its workers with robots.
Weaknesses Stigma of being “chicks only” means more diverse user base is. harder to accomplish. Stumbled in first earnings report—lost $41 million in Q1. Homemade sunscreen recipes leave users burned.
Weaknesses Generated $30 million in losses last year on revenue of only $88 million. May not be able to label themselves as “meat” if EU law passes. Has competition in “Impossible Burger” and from actual cows.
Special Skills Getting your drunk ass home after too many dranks at da club.
Special Skills Helps make a bomb-ass spicy buffalo chicken cheese dip.
Special Skills Makes hanging out with a vegan significant other a bit more bearable.
Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
july 2019 | luckbox
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The
B U S I N E S S of E S P O R T S
hile we weren’t looking, video gaming grew into something called esports—a professional sport complete with well-paid players, huge fan followings, sold-out arenas, lucrative sponsorships and hefty tournament payouts. For video game developers and publishers, esports functions as both marketing expense and operating income. Esports can keep the general public engaged in video gaming and willing to spend more on games. Today’s dominant video game, League of Legends (LoL), was developed by Riot Games, which was purchased by Chinese tech giant Tencent in 2011. LoL uses five-player teams who control characters with differing abilities and attributes The goal is to push into the opposing team’s base and destroy it. Because each game takes place on the same map, fans can easily follow what’s going on and every game offers a balanced playing board. Live tournaments fill huge stadiums like the Staples Center in LA and Seoul’s World Cup Stadium. Prize pools often reach eight figures, and big-name sponsors like Samsung, Red Bull and Coca Cola, pony up for advertising. Esports tournaments also attract tens of thousands of fans, and millions of online viewers. To lead off this special luckbox leans in report, the editors joined forces with Newzoo, a leading global provider of esports analytics, to provide an introduction to the opportunities that lie ahead in the fast-growing world of competitive electronic gaming.
W
12
Newzoo: Amsterdambased Newzoo, a leading global provider of games and esports analytics and research, provides esports market insight and data to the world’s largest entertainment, technology and media companies. The firm specializes in daily consulting on investment, marketing, sales and product development.
PHOTOGRAPH BY MARV WATSON
The Business of Esports
luckbox | july 2019
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KEY TERMS Esports: Professional-level competitive gaming in an organized tournament or league with a specific goal, such as winning a championship title or prize money. Streaming: One person, or sometimes a group of people, streaming live video via a streaming platform to enable viewers to see what’s happening at that moment. Media Rights Revenues: Revenues generated through media property, including all revenues paid to industry stakeholders to secure the rights to show esports content on a channel. It includes payments from online streaming platforms to organizers to broadcast their content, foreign broadcasters securing rights to show content in their country, or copyright costs to show video content or photos of an esports competition. Sponsorship Revenues: Revenues generated by teams and organizers through sponsorship deals. This includes all deals relating to sponsoring an event, including product placement, sponsoring teams, and payments by brands for the use of team, event or game-specific IP rights in their marketing communications. Any advertisements sold as part of a sponsorship package are also included in sponsorship revenues. Game Publisher Fees: Revenues paid by game publishers to independent esports organizers for hosting events. This excludes investments or spending by game publishers on their own events because that is considered part of their regular marketing effort.
Wagering On Esports SPECIAL SECTION
Electronic Gaming & The Business of Esports
Companies . . . . . . Investors . . . . . . . . Audience . . . . . . . . Prizes . . . . . . . . . . Valuations . . . . . . Players . . . . . . . . . Fortnite . . . . . . . . . Stadia . . . . . . . . . . Glu Mobile . . . . . . .
15 16 18 19 20 21 24 26 28
The final match up at the Mid Season Invitational of League of Legends 2015 Season, held in Tallahassee, Fla.
Esports betting resembles traditional sports wagering, which has long been a fundamental part of that industry. In particular, esports betting in the United States is on track to grow significantly because some states are legalizing betting for certain sports, including esports. Fantasy drafting is gaining popularity with fans, and Riot Games offers it for free in connection with its major leagues and World Championship event. Esports organizations appear ready to provide incentives for fantasy drafting by offering rewards, such as in-game currency and cosmetics. In addition, betting operators will continue to expand their sponsorship and will offer more forms of esports betting, such as liveaction betting on results (bookmaking). Newzoo predicts fans’ collective spending on esports betting will soon surpass their spending on esports merchandise and tickets.
july 2019 | luckbox
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The
B U S I N E S S of E S P O R T S
Key Takeaways
ESPORTS GLOBAL AUDIENCE GROWTH
2019 Global esports revenues will surpass $1 billion for the first time Global esports revenues will grow to $1.1 billion in 2019, a year-on-year growth of +26.7%. North America will generate $409 million of this amount, while China will account for $210 million. 1
In 2019, $897 million in revenues, or 82% of the total market, will come from brand investments (media rights, advertising and sponsorship). That will increase to $1.5 billion by 2022, making up 87% of total esports revenues. 2
Globally, the total esports audience will grow to 453 million in 2019, a year-on-year growth of +15.0%. Esports Enthusiasts will make up 201 million of this number, growing +16.3% year on year. 3
2019 ESPORTS GLOBAL REVENUE STREAMS
China will have the most Esports Enthusiasts in 2019 with 75 million, followed by the U.S. and Brazil. South Korea will have the highest share of Esports Enthusiasts relative to its online population (Esports Density) in 2019 with 12%. 4
The global average revenue per Esports Enthusiast will be $5.45 this year, up +8.9% from $5 in 2018. 5
Last year, 737 major events occurred. Together, they generated $55 million in ticket revenues, down from $59 million in 2017. 6
Last year’s total prize money reached $151 million, a significant increase from 2017’s $112 million. 7
The League of Legends World Championship was last year’s biggest tournament by live viewership hours on Twitch—a livestreaming platform for gamers—with 53.8 million hours. It also produced $1.9 million in ticket revenues. The Overwatch League was the mostwatched league by live viewership hours on Twitch, generating 79.5 million hours. 8
Global Population
Online Population
Esports Enthusiasts
Esports Revenues
Annual Revenue per Enthusiast
7.7B 4.1B 201.2M $1.1B $5.40
2019 figures
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AAPL, GOOG
THE TOP 25 PUBLICLY TRADED GAME COMPANIES EARNED MORE THAN $100 BILLION IN GAMING REVENUES
Top 10 Gaming Stocks ast year, the 25 public companies with the largest game revenues generated a combined $107.3 billion, up +16% from 2017. That marks the first time they have exceeded the 100-billion-dollar mark—a milestone for the market. Together, those companies accounted for nearly 80% of the $134.9 billion global games market. Tencent (TCEHY) alone earned $19.7 billion in revenues, accounting for nearly 15% of the entire games market, and it was the world’s No. 1 public company by game revenues for the sixth year running. Tencent is followed by Sony (SNE), Microsoft (MSFT), Apple (AAPL) and Activision Blizzard (ATVI), respectively. Combined, the Top 10 companies grew +19% year on year. However, the top 11-25 companies together grew just +6% year on year, with many companies in this bracket unable to keep pace with the market leaders.
L
TOP 10 PUBLIC COMPANIES BY GAME REVENUES
Jurre Pannekeet, senior market analyst at Newzoo, models the esports economy, finds and dissects key esports trends and helps brands shape esports strategies. Sander Bosman, Newzoo vice president of research, is the company’s second-ever employee and leads the Consumer Research and Insights team. newzoo.com @newzoohq. Tom Wijman, Newzoo senior games market analyst, leads the company’s efforts on the global games market, forecasting revenues and players per market and identifying how trends influence those markets. @newzoohq
Apple and Google’s New Gaming Market Plays Apple (AAPL) and Google (GOOG) have long monetized video gaming. The consistently strong performance of those two American tech giants is a direct result of revenues generated by their respective app stores, where both take their cut of every transaction. Now, both companies have revealed initiatives that will expand their involvement in the global games market. Google has recently announced Stadia, a cloud gaming platform that enables users to stream entire games via the internet. The games run on hardware at Google’s data centers, which means consumers don’t need to own expensive hardware. At the same time, Google announced the creation of Stadia Games and Entertainment, a studio that will develop Stadia-exclusive games. (see p.26) Meanwhile, Apple plans to release Apple Arcade this year. The subscription service gives users access to a library of 100 new games for a monthly subscription fee. The platform will carry no ads and no in-app purchases—key drivers for growth in the games market in past years. Both companies have acquired top talent from the games market but have remained quiet about expansion plans. Both intend to use their strengths to expand their activities in the games market: Google leverages the global presence of its data centers and strong tech credentials, while Apple will rely on its expertise in accessibility and its focus on curating content.
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FINANCIERS, ENTERTAINERS AND PROFESSIONAL ATHLETES ARE INVESTING HEAVILY IN ESPORTS
Follow the Money By Rocio Villasenor
—Newzoo
In late May, Peak6, the Chicago private venture investment and trading firm, acquired Evil Geniuses, a premier global esports team that’s among the most recognized brands in professional gaming. The acquisition, whose details were not disclosed, adds Evil Geniuses to Peak6’s portfolio of traditional sport-related brands and businesses, which includes three European soccer teams, a U.S. pro hockey team, and several sports technology holdings.
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Celebrity-rapper Sean “Diddy” Combs joined a group of investors that put $30.5 million into PlayVS.
Wes Edens, co-owner of the Milwaukee Bucks, and Pete Briger, chairman of Fortress Investment Group, have invested in FlyQuest, a franchise in the League of Legends Championship Series and competitor in the Fortnite World Cup.
Ashton Kutcher became a successful venture capitalist in the early 2010s. Since then, he has invested in tech companies directly or through his Sound Ventures company, putting money into Airbnb, Skype and other businesses that focus on digital commerce. He’s a big investor in Unikrn, an esports cryptocurrency betting platform that recently became a more solid investment when it attained a full gambling license from the Isle of Man.
Shaquille O’Neal is putting time and money into NRG esports, which operates the San Francisco Shock in The Overwatch League.
PHOTOGRAPHS: (KUTCHER) REUTERS/STEVE MARCUS; (O’NEAL) REUTERS/MIKE SEGAR
In 2018, angel investors, venture capitalists and sponsors injected $682 million into esports.
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PHOTOGRAPHS: (JORDAN) BOB DONNAN-USA TODAY SPORTS; (LOPEZ) REUTERS/ANDREW KELLY; (AOKI) REUTERS/MARIO ANZUONI; (TEAM LIQUID) FLICKR/ COLIN YOUNG-WOLFF/RIOT GAMES
Michael Jordan is an investor in aXiomatic, an esports ownership group that owns the popular and the accomplished Team Liquid.
In 2017, Jennifer Lopez, invested in the NRG esports brand.
EDM musician, DJ and producer Steve Aoki had invested in the Rogue Gaming esports team, which was then acquired by Rekt Global. The team is active in six esports titles, including Fortnite.
Athletes Steve Young, Stephen Curry and Andre Iguodala joined a $37 million investment in esports Team TSM. Besides owning the Dallas Mavericks, Mark Cuban is a key investor in Unikrn, a cryptocurrency-enabled esports betting company.
Canadian hip-hop artist Drake has invested $25 million in 100 Thieves, a top-ranking esports company. Kevin Durant and Odell Beckham Jr. joined a group that put $38 million into Vision Esports.
Tony Robbins, whose net worth is pegged at $500 million, has joined Magic Johnson on the investment team that bought Team Liquid.
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B U S I N E S S of E S P O R T S
As the Esports Audience Grows, So Do Valuations To illustrate the rapid and widespread adoption of esports, luckbox provides analysis and investment perspectives from Konvoy Ventures, a venture capital firm that invests in earlystage companies in esports and video gaming By Josh Chapman
Video Gaming: The Next 1 Billion Players The cost of gaming via PC or console is decreasing, which should fuel adoption and boost esports Video gaming is heating up around the world. In fact, more than 2.3 billion people are playing and more than 380 million watch esports. Consumers are spending more discretionary income on digital entertainment while the price of video gaming equipment is decreasing. It’s a combination of trends that should result in continued consumer adoption and accelerating monetization of the global video gaming industry. Meanwhile, video gaming is becoming more socially acceptable for players in a variety of age groups. That not only includes today’s teenagers and millennials but also the “Atari Generation.” About 43% of mobile gamers are parents who continue to play as adults. Additionally, it’s not only men that play video game—women account for 45% of gamers and 30% of esports viewers in America. At the same time, the lower cost of playing seems likely to entice more people into taking up video gaming. PC and console costs Players have two hardware options
The DreamHack 2015 tour drew a massive crowd at a stop in the Romanian city of Cluj-Napoca.
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PHOTOGRAPHS: (DREAMHACK) COURTESY OF DREAMHACK; (PS4) SHUTTERSTOCK.COM
The
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SNE, MSFT, NTDOY
for video gaming: personal computers or gaming consoles. Console gaming largely revolves around Playstation form Sony (SNE) and Xbox from Microsoft (MSFT). Switch from Nintendo (NTDOY) lags far behind in third place. Playstation 4 has sold 75 million units, Xbox One has sold between 30 million and 50 million, and Nintendo Switch has sold 17 million. PCs offers better visuals, a greater number of indie titles and more affordable games, but are substantially more expensive to buy than consoles, according to GamingScan, a website that carries product reviews. Here’s the bottom line: In the past, owning a quality gaming PC was significantly more expensive than playing on a console. Today, that gap is quickly closing thanks to lower manufacturing and hardware costs.
PHOTOGRAPH: FLICKR/LOL ESPORTS
Despite making less money these days, Americans choose to spend more of their discretionary income on entertainment
Spending more on entertainment While average income has decreased recently by 1.5% in the United States, according to the Bureau of Labor Statistics, entertainment spending has increased by 10%. Despite making less money, Americans still choose to spend more of their discretionary income on entertainment. The narrowing price gap between console and PC gives consumers more options that they can afford. This trend appears likely to continue, especially as production costs of hardware decline and the rise of cloud gaming ensues. Once cloud gaming becomes ubiquitous, gamers won’t need to update hardware as regularly to fully experience any game. From 100 million players in 1995 to 2.3 billion today yields a 14.38% compound annual growth rate— the next 1 billion gamers are close at hand.
A win is rewarded at the 2018 World Championship Finals at the Incheon Munhak Stadium in Incheon, South Korea.
Esports Prize Pools Are Growing Fast Gaming tournament rewards now rival the size of some of the largest purses offered to winners in traditional sports Esports pros are reaping the benefits of dramatic increases in prize money. In 2010, the total esports prize pool for almost all events in every tracked title totaled about $3 million. In stark contrast, esports paid $156 million in prizes last year. Compensation for esports athletes resembles that of golf and tennis. Those sports lack the high salaries of basketball, hockey, football, soccer and baseball but pay off in lucrative prizes, sponsorships and endorsements.
TOP 10 PRIZE POOLS BY EVENT
In 10 years, esports pros may see changes in compensation as high salary and more multi-year contracts. With that trajectory, esports prize pools and athlete compensation may quickly compete with the top traditional sports athletes in the not-so-distant future. Below is a list of the Top 10 events of 2018 by prize pools. Two of the biggest prizes were in esports: The International 2018 (Dota 2) and League of Legends World Championship.
World Series
$66,000,000
US Open-Tennis
$53,000,000
FedEx Cup
$35,000,000
Dubai World Cup Night
$27,250,000
The International
$25,500,000
US Open-Golf The Masters Super Bowl
$12,000,000 $11,000,000 $9,200,000
Stanley Cup
$7,000,000
LoL World Finals
$6,450,000
raditional Sports T E sports
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Today’s Esports Team Valuations = NBA Teams in the 1980s Today, every NBA team is worth more than $1 billion. Esports teams could reach similar heights, perhaps even more, in the near future. History is repeating itself, but more quickly this time Esports teams are attracting investments of about the same size as NBA teams of the 1980s. Examples include Cloud9 raising $50 million, TSM raising $37 million, and Team Liquid raising $25 million. In the 1980s, 15 NBA teams were purchased in whole or in part ranging from $9.8 million for the Houston Rockets in 1982 to $120 million for the Boston Celtics in 1986. Those figures are similar to the $37M average for top esports organizations today. Two significant outliers occurred among the 1980s NBA transactions: Portland and Boston. They alone increase the average by nearly 50%. Adjust for inflation and remove those two from the table, the average NBA franchise investments were within 5% of the three most notable recent investments in esports organizations. When those NBA transactions were completed, teams were valued from $10 million to $120 million, and today every NBA team is worth more than $1 billion. Most of the value appreciation can be attributed to technological advances that have brought wider viewership, which in turn has created lucrative media rights deals for the NBA and its teams. That’s important because esports franchises already have the viewership, and today’s digital distribution platforms will enable rapid audience acquisition and adoption. With more viewership comes more rich media deals. The esports audience Esports team franchises appear inherently lucrative because of their global digital audience. The NBA audiences in the 1980s were predominantly based in the United States and the teams couldn’t develop wide-
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spread, loyal fan bases abroad. Global potential should help esports franchises appreciate in value at a materially faster rate than the NBA franchises from the 1980s. They have comparable audiences; considering the Overwatch League’s 10.8 million viewers today versus the NBA’s 13.2 million viewers in the 80s. Another reason for esports teams to appreciate in value is the age of their fans. The average NBA viewer is 42 years old, but according to Nielsen, the average age of esports viewers is 31 and 61% of viewers are millennials. These factors should drive the appreciation of valuations because those viewers have grown up not only watching esports, but also continue playing as they get older. With traditional sports, the majority of the viewers are just fans—even if they played the sport when they were younger they probably are not playing regularly years later. Millennials have a lasting affinity for the video games they grew up playing (and still play today) because they enjoy the exact same game at a high level of competitiveness. This dynamic is going to keep them engaged for years. It’s similar to golf, which players continue to enjoy for a long time. The same will be true for the younger Gen X and Gen Z demographics. History is repeating itself… but faster. Esports could do in five to 10 years what took the NBA over 30 years to achieve.
ESPORTS TEAM VALUATIONS: BACK TO THE FUTURE In millions, adjusted for inflation
The average age of esports viewers is 31, and 61% of viewers are millennials
Josh Chapman is managing partner at Konvoy Ventures, a Denver-based venturecapital fund specializing in esports and video gaming. @joshchapmn
Esports teams will reach $1 billion valuations more quickly than NBA teams Early-stage team transaction values are similar
Esports Teams
Price
Team Liquid
$25
Team SoloMid
$37
Cloud9
$50
Avg. Deal
$37.3
NBA Transactions
Price
Chicago Bulls (’85)
$18.6
Houston Rockets (’82)
$22.1
Kansas City Kings (’83)
$23.0
Indiana Pacers (’83)
$24.1
Philadelphia 76ers (’81)
$28.8
LA Clippers (’81)
$31.2
Milwaukee Bucks (’85)
$38.5
Denver Nuggets (’85)
$40.5
Cleveland Cavs (’83)
$43.8
Utah Jazz (’85)
$44.1
Seattle Sonics (’83)
$46.0
Phoenix Suns (’87)
$85.4
Digital platforms for esports will drive audience acquisition more quickly than NBA franchises
Portland Trailblazers (’86)
$129.0
Boston Celtics (’86)
$238.7
Avg. Deal
$58.2
The asset value appreciation timeline will be much faster for esports than NBA valuations
Avg. Deal (x-Bos & Por)
$38.9 Source: Konvoy Ventures
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WITH ESPORTS PRIZE POOLS IN THE MILLIONS, WHERE DOES THE MONEY FLOW? MEET A PAST AND PRESENT PRO
Young Money By Ed Mckiney
PHOTOGRAPH: (LIU) ROBBIE NAKAMURA; (SUNDERHAFT) TING
This Med Student spent his gap year as an esports pro After devoting a gap year between high school and college to playing StarCraft II professionally, Conan “Suppy” Liu, aka “Superiorwolf,” went back to the books, completing a bachelor’s at the University of California at Berkeley. But he didn’t stop there. Now, he’s studying medicine at Sidney Kimmel Medical College of the Thomas Jefferson University in Philadelphia. When it comes to meeting the high cost of so much education, it can’t hurt that Liu racked up $75,000 in prize money during his pro esports days, having his best year at age 19.
A seasoned pro with upside mo Young, inexperienced professional gamers can fall victim to unscrupulous organizations looking to make a quick profit in esports, says highly ranked StarCraft II player Alex “Neeb” Sunderhaft. “Being mistreated as a player is fairly common,” he maintains. “I’m being paid fairly, for sure, but not all players are.” Understandably, teenaged pros generally don’t have much previous experience of the world when they hit the big time, Sunderhaft, notes. “I’ve never worked a conventional job in my life,” says the 21-year-old who’s been making his presence felt on the professional scene since age 16. Nefarious teams can take advantage of such inexperience, some observers claim. One young pro, Turner “Tfue” Tunney, recently sued Team Faze Clan for allegedly limiting his business opportunities, appropriating a huge share of his earnings, and encouraging him to gamble and drink underage, according to published reports. But Sunderhaft reports that he hasn’t experienced the fate described in Tenny’s headline-making lawsuit. “My sponsor, (mobile —Neeb networker) Ting, has been easy to work with and reliable regarding salary,” Sunderhaft says. In the past four to five years, he’s reportedly earned just shy of $440,000 in 156 tournaments. That degree of success required extraordinary measures. After graduating from high school Sunderhaft skipped college and moved from New York to South Korea to hone his skills on StarCraft, because that’s where that game’s played with particular intensity. “I practice three to four hours a day, which is standard for StarCraft,” Sunderhaft says of his current regime. “I’d imagine the very popular games have players with strict practice schedules to optimize their entire day, just as StarCraft did when it was at its peak about eight years ago.” Looking to the future, Sunderhaft plans to “simply enjoy StarCraft for as long as it stays a viable esport.” But he doesn’t blame other professional video game players for dreaming big. “Esports offers endless opportunities for ordinary people,” he says. “I’ve been grateful ever since I started almost 10 years ago.”
“I’ve never worked a conventional job in my life”
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THE OLD GUARD OF PRO GAMERS (THE 20-SOMETHINGS) HAVE ENJOYED BIG PAYDAYS, BUT A CROP OF YOUNG TALENT IS RISING UP BEHIND THEM
The Next Generation of Gamers By Ed McKinley
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he timing must have been right for the High School Esports League. In a few short years it’s grown into a national movement with 50,000 players in clubs at more than 1,800 schools in North America.
Schools face off in a recent Call of Duty Regional Championship competition in Schenectady, NY.
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The phenomenon is continuing to build momentum as some schools elevate their esports clubs to fullfledged varsity sport status, says Mason Mullenioux, the league’s CEO. It all began with an origins story that belongs in a time capsule. Mullenioux and his childhood friend Charles Reilly were searching for their place in the world after graduating from Old Mizzou (the University of Missouri at Columbia) in 2010. They were set adrift as the nation suffered through the third year of the Great Recession. “No one could find a job anywhere,” Mullenioux recalls. “We were delivering pizzas for Papa John’s, and we both lived with our parents. When we got off work we’d go over to Charlie’s house and think about what we were going to do.” The only plan they devised that actually appealed to them was launching an esports league for high school players. So, they started the league in 2012 as an unpaid hobby. They soon found high schoolers had a lot of interest, so they kept at it. In the meantime, both found substantial jobs. Mullenioux began working as a project manager for Sprint, and Reilly managed the parts department at a Subaru dealership. But passion prevailed, and in a few years the league grew into a business based in Kansas City. When they found themselves taking too many league-related calls at work, they quit their day jobs and devoted themselves to the league. Probably because the timing was so right, Mullenioux and Reilly soon discovered that someone else was doing exactly the same thing at the same time and giving it the same name. Half a continent away in San Francisco, Aaron Hawkey also had started a league. Instead of competing, the three joined forces, with Mullenioux becoming CEO, Reilly taking on chief operating officer duties and Hawkey serving as chief technology officer. They raised money from friends and family to build a tech platform, and by 2016 the technical backbone
PHOTOGRAPH: KRISTIN DUGUAY
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was in place and the time had come to begin charging for league membership. But the fees weren’t just a profit center, according to Mullenioux. “We needed the students to take it seriously,” he says of the league’s early days. “They needed to have skin in the game to finish the season.” Now, the league’s 15 full-time staffers are scattered across the nation in Kansas City, San Diego, San Francisco, Texas and Maine. The five part-timers and the volunteers are similarly decentralized. The geographic diversity came about by chance but has worked to the league’s advantage because its officials can travel conveniently to conventions anywhere in the country. But the staff can’t do it all alone. The league stipulates that a teacher or coach from each school must take responsibility for the league’s club. Each school also has to supply written approval of the club as a recognized school activity. About 85% of the league’s players belong to school-sanctioned clubs, and students at schools without clubs can join free-agent leagues. The free agents often help start clubs at their schools, Mullenioux notes. More often than not students launch the clubs. “They know who the cool teacher is,” and can enlist help. Some teachers become enthusiastic, and that leads to the highest success rate, Mullenioux says. Those teachers “seek students, make morning announcements and pass out fliers,” he adds. The league can charge teams or students to participate. Students can pool their membership applications to qualify for discounts. Sometimes school budgets cover the fees. The league charges players $30 per season, which is less than competing organizations collect, according to Mullenioux. Overwatch and League of Legends are two of the most popular games at the moment, he observes. Nine games are available for league play, but the league tests new games during the slow seasons and adopts them if they prove popular. Clubs have formed at schools in all types of places, but suburban schools have been most likely to join the league, Mullenioux says. Rural locations may lack good internet connectivity and have long travel times to matches. Inner city schools and students may lack the funds. The league is setting up a not-for-profit organization to help underwrite the costs for schools and students in need. So far, high school and college esports teams aren’t attracting the huge viewership that pros generate. A few friends and family members typically watch high school esports matches, but the competitions don’t attract the cheering crowds that pack the stands for football or basketball. “We’ re going to get there,” Mullenioux predicts, “but it will take a little more time.” How much more time? In three to five years a significant number of high schools will field varsity esports team and will attract heavy viewership, Mullenioux says. That should generate enough excitement to take high school esports to the next level, he maintains. A few schools have already established esports arenas, and some states have taken steps to become sanctioning bodies. Outstanding competitors in organized high school leagues can attract the attention of college recruiters at schools that offer esports scholarships. “All the college eyes are on us,” Mullenioux maintains. “There are scholarships out there that are unfilled because they can’t find kids to come play.” Colleges are also seeking streamers, Runaway growth: high commentators, club managers and assistant coaches. Fillschool video ing those roles will become easier as high school esports gaming becomes ubiquitous, he predicts.
Fast Times at Bay Shore High
PHOTOGRAPH: MIKE MASINO
“All the college eyes are on us … there are scholarships out there that are unfilled because they can’t find kids to come play”
At most high schools, the quiet kid who aces AP calculus might never have a conversation with the star quarterback. But at Bay Shore High School on Long Island, that unlikely duo just might become friends after discovering they both play StarCraft. It’s something that happens in the school’s video game club, which was designed with a community side as well as a competitive side, says Ryan Champlin, a senior who’s credited with organizing the club two years ago. The club’s competitive side has scored some wild successes, too, with the Call of Duty team going undefeated in North American competition and the Rainbow Six team occupying a spot in North America’s Top five teams since its inception. One Bay Shore student, 17-year-old Justin “jstn” Morales, can’t compete on the school’s teams because he already plays professionally for the powerhouse NRG squad. He’s been bringing home serious prize money while remaining admirably humble, Champlin says. (Morales has earned $76,854 in prize money in 11 tournaments, according to the Esports Earnings website.) Every senior in the club has received a college esports scholarship offer, Champlin notes. “To a school in California I was actually given an athletic scholarship—same as basketball, lacrosse, football,” he maintains. “I was regarded as an athlete for esports, which is absolutely crazy!” More than 160 club members participate in sanctioned competition, but many others drop into the club facilities simply to play games. Sponsorships have financed a fully equipped gaming arena where team members play sideby-side and face off against opponents across the room. “That makes it more like a sports event that’s easier for adults to grasp,” Champlin says of the face-to-face encounters.
Ryan Champlin solicited help from family and friends to start a gaming club at his school.
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Epic Games grossed $3 billion profit last year, according to TechCrunch.
Fortnite: An Epic Blockbuster
Tim Sweeney started Epic Games, parent of Fortnite, in 1991 by commuting 30 minutes each way from his University of Maryland dorm to a makeshift office in his parents’ garage. Fortnite became the world’s most popular game last year, growing the company’s valuation to $15 billion.
Fortnite popularized the “Battle Royale” category—a 100-player elimination format that evokes The Hunger Games.
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A million players tried “Battle Royale” on the category’s first day—Sept. 26, 2017. In two weeks, 10 million were playing.
Today, Fortnite has more than 250 million registered players around the world, according to Epic Games.
70%
Fortnite is free to play because Epic Games earns revenue when players make in-game purchases of costumes (“skins”) or dance moves that have no effect on player performance.
Epic CEO Sweeney reportedly amassed a $7.2 billion fortune by 2018, making him the 194th richest person in the Bloomberg Billionaires Index.
Epic Games is offering $40 million in prize money for the first Fortnite World Cup, which was scheduled to culminate July 28. The company has pledged $100 million in total prize money for Fortnite events this year.
PHOTOGRAPH: (BATTLE) EPIC GAMES; (SKINS) PRO GAME GUIDE; (SWEENEY) WIKIPEDIA
Nearly 70% of players made in-game purchases, with the average value of $84.67 between July 2017 and June of last year, a LendEDU survey indicates.
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Meet the Ninja
PHOTOGRAPH: (BLEVINS) REUTERS/ANDREW KELLY; (DRAKE) REUTERS FILE PHOTO; (FORTNITE, DOTA 2) IGDB; (L.O.L.) RIOT GAMES; (OVERWATCH) BLIZZARD; (HEARTHSTONE, W.O.W., APEX LEGENDS, MORTAL KOMBAT) FLICKR; (COUNTER-STRIKE) WIKIPEDIA; (PUBG) GAMING TREND;
TOP 10 FREE-TO-PLAY GAMES BY REVENUE 1
Fortnite
Epic Games
$3.0 billion
2
Dungeon Fighter
Nexon (NEXOF)
$1.5 billion
3
League of Legends
Tencent Holding (TCEHY)
$1.4 billion
4
Pokemon GO
Niantic
$1.3 billion
5
Crossfire
Neowiz Games
$1.3 billion
6
Honour of Kings
Tencent Holding (TCEHY)
$1.3 billion
7
Fate / Grand Order
Aniplex
$1.2 billion
8
Candy Crush Saga
Activision Blizzard Inc. (ATVI)
$1.1 billion
9
Monster Strike
Mixi (MIXIF)
$1.0 billion
10
Clash Royale
Tencent Holding (TCEHY)
$0.9 billion
Tyler Blevins, popularly known as Ninja, a pre-eminent Fortnite player with neon-colored hair, told CNN he earned roughly $10 million in 2018. In March of 2018, more than 635,000 viewers watched Ninja compete with rapper Drake on Twitch, setting a new record for the streaming platform. Ninja, who’s 27, has become the most popular professional gamer in the world, with more than 22 million YouTube subscribers and 14 million Twitch followers.
Source: SuperData
Twitch, an online streaming service, broadcasts gameplay live from anywhere in the world. It provides an online transmission platform for everyone from large esports tournament promoters to private streamers.
Most popular esports games Viewing hours spent on Twitch, 30-day period, as of April
1
2
3
4
5
6
7
8
9
10
Fortnite 106,232,483
League of Legends 95,563,475
Dota 2 39,411,889
Overwatch 30,639,347
Hearthstone 29,978,633
CounterStrike 28,146,844
PUBG 23,026,620
World of Warcraft 20,296,887
Apex Legends 17,971,621
Mortal Kombat 11 9,632,486 Source: ipso.com
Video games have become pervasive in the lives of most American teenagers and serve as a way of making and maintaining friendships. Fully 72% of all teens play video games on a computer, game console or portable device like a cellphone, and 81% of teens have or have access to a game console. —Pew Research Center, May 2019 july 2019 | luckbox
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VIDEO GAME COMPANIES DERIVE MORE THAN 70% OF THEIR REVENUE FROM CONSOLE-BASED GAMES. HERE COMES THE CLOUD.
Google’s Got Game By Ryan Shaw
wo years ago, games like Fortnite and PlayerUnknown’s Battlegrounds shook up the game industry, delivering an easily accessible platform that connected them to dozens of players around the world from multiple devices. Players flocked to the new games with an almost cult-like voracity, catching established game makers off guard. Two years later, a company not synonymous with gaming is looking to make an even bigger splash. The Google (GOOGL) announcement of its cloud-based gaming service called Stadia looks to disrupt an industry that has been surprisingly static until recently. Since the inception of Nintendo (NTDOY) 30 years ago, gamers have been buying cartridges and disks to plug in to their clunky gaming consoles. While newer consoles can download the game to the console directly, users are still confined to the console and the storage limitations that come with it. Google looks to trash the console-based gaming industry, enabling users to stream games from multiple devices, much like Netflix (NFLX) or Hulu. While games have evolved tremendously over the years into beautiful and massively scaled masterpieces, little else has changed in the way players purchase and use video games. Bringing players online to play together and against each other was arguably the only major paradigm shift the industry has seen. Video game and console makers have been stuck in a rut of simply improving the foundations that are already there, instead of finding a new way to consume content. Stadia looks to take advantage of that complacency.
T
TWITCH HAS THE KEY
According to TwitchTracker, Twitch’s average viewing growth has increased more than 100% since 2015.
TWITCH KEY PERFORMANCE INDICATORS vg concurrent viewers A Avg concurrent channels
Source: TwitchTracker.com
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Stadia not only releases gamers from the confines of gaming consoles, but also integrates services such as Twitch. According to TwitchTracker, Twitch’s average viewing growth has increased more than 100% since 2015 (See “Twitch has the key,” below). Stadia aims to integrate those who watch video games with those who play them, even enabling those watching to join the game in certain cases. With YouTube in their holster, one can imagine this integration would be seamless. Video game companies such as Electronic Arts (EA) derive more than 70% of their revenue from consolebased games, according to their fourth-quarter earnings report, with more than half of that revenue coming from service-based fees and charges. That includes in-game purchases, subscriptions and add-on content. It’s impossible to deny that the business model is changing to more service and subscriptions, instead of just direct-game sales. Fortnite was a wakeup call that supplied the kind of content the video game world lacks. In addition to high-end blockbuster games such as Call of Duty and Madden, demand is high for simpler games with little or no initial cost. Those games capture their audience’s time with the addictive gameplay opportunity to engage with dozens of human-controlled characters, and
If Stadia delivers exclusive content that draws eyes from competitors, console-based gaming companies could find themselves on the wrong end of a gaming revolution
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GOOGL, NTDOY, AMZN, NFLX, EA, MSFT, AAPL, ATVI, SNE
capture audience dollars by offering low-cost additions, upgrades and extra content that serve as a recurring revenue stream instead of just a onetime purchase. Cloud streaming can thrive with that type of game design and an intuitive connection among watching, playing and interacting with others in a platform. While it may have been hard for them to create the grand-spectacle masterpieces made famous by established companies, they appear likely to have a much easier time focusing on the shareable experience games provide. Stadia and other ambitious cloud-streaming gaming platforms’ success will likely come down to content, like the Netflix (NFLX) stranglehold on the video streaming business. If Google can acquire or engineer games that pull more users from console-based gaming to the cloud, they could position themselves the way Netflix did in the beginning of the video-streaming boom. Google will have to beat competitors like Microsoft (MSFT), Amazon (AMZN) and possibly Apple, (AAPL), though it seems they’re first on the scene. While Stadia will represent only a small part of Google’s business for the foreseeable future, its impact on gaming companies such as Electronic Arts, Activision Blizzard (ATVI), and Sony (SNE) may be felt earlier as hype builds for cloud-based gaming. It’s not clear yet where and if Google will turn a profit in this venture, but with the cash hoard Google has at its disposable it seems they’re willing to do what it takes to earn market share. With the price rumored to be free initially, Google can undercut the market until it gains its followers, much like the Amazon model of the last 20 years. If Stadia delivers exclusive content that draws eyes from competitors, console-based gaming companies could find themselves on the wrong end of a gaming revolution. For investors who are considering a gaming play for the long term, it’s possible buying Google and selling companies like Electronic Arts and Activision Blizzard offers a compelling pairs trade. If gaming continues to take off in popularity, Google seems likely to execute its plan with some success. That could be the positive catalyst many are waiting for from the company. If not, it will be sheltered from the secular trend away
PHOTOGRAPH: REUTERS/STEPHEN LAM
RECENT PERFORMANCE
from gaming, while gaming companies will feel the full brunt. Adding the third scenario of Google taking significant market share from the established companies, being long Google and short Electronic Arts could prove a winning strategy. Ryan Shaw, a futures and derivatives trader, specializes in option spreads and pairs trading at NinjaTrader, analyzing order execution, charting and automated strategies.
Google Vice President and General Manager Phil Harrison announces new video gaming streaming service named Stadia.
While Stadia will represent only a small part of Google’s business for the foreseeable future, its impact on gaming companies such as Electronic Arts, Activision Blizzard and Sony may be felt earlier as hype builds for cloud-based gaming.
JULY 26, 2018– MAY 13, 2019 Alphabet E lectronic Arts Activision Source: StockCharts.com
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The
B U S I N E S S of E S P O R T S
ELECTRONIC GAMING STOCKS APPEAR LIKELY TO REMAIN HIGHLY VOLATILE. HERE’S HOW TO CAPITALIZE ON TRADING OPPORTUNITIES LIKELY TO ARISE WITH ONE OF THE SECTOR’S HIGH FLYERS
Glu Mobile: Boom and Bust Cycle Continues By David Trainer & Sam McBride
n the summer of 2014, Glu Mobile (GLUU) was riding high. Hit games that included Deer Hunter, Dino Hunter and Kim Kardashian: Hollywood drove triple-digit revenue growth. The company was on its way to its first ever annual profit, and the stock traded at all-time highs. But the glow soon faded. Follow-up games flopped, expenses piled up and the stock—which had topped out above $7 per share—fell to $2 in 2016. These days, Glu’s situation looks similar to its position in 2014—just replace the names of the 2014 games with today’s Design Home, Covet Fashion and Tap Sports: Baseball. Despite recent growth, the business still has no clear path to sustained growth or profitability.
I
Faux business model The problem with valuing game developers is that their revenues can be irregular. One hit game can overshadow longer-term downtrends. In its 11 years as a public company, Glu has experienced several cycles of growth and decline, as shown in “Ways to get short” (page 29). Glu’s Annual Revenue Growth Since 2008 Besides compiling a record of volatile revenue swings, Glu has rarely
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achieved profitability. In 2014, the only year when Glu earned an operating profit, the company managed a return on invested capital of only 3%. Over the past five years, Glu’s average annual free cash flow has been -$66 million (5% of market cap). To finance that negative cash flow, Glu has diluted the holdings of existing shareholders by selling more stock. Since March 1, 2015, Glu’s share count has increased by 35%.
Despite recent growth, the business still has no clear path to sustained growth or profitability
An unworkable business model? Bulls will argue that investors should expect Glu’s losses and volatile revenues because the company’s still in the early stages of building a profitable mobile gaming platform. New Constructs believes Glu will remain stuck in this cycle indefinitely. Successful content creators, such as Disney (DIS), or successful console game developers, like Activision Blizzard (ATVI), enjoy competitive advantages that a purely mobile gaming company lacks, including:
Branding: Consumers feel loyal to movie studios. They go see a Pixar movie just because it’s Pixar. There’s no evidence to suggest that mobile game developers build that sort of brand loyalty. Glu has tried to piggyback on established brands like Kim Kardashian and Major League Baseball, but that strategy requires paying royalties and sacrificing margins. Sequels and Franchising: Sequels frequently do well at the box office. ATVI generates reliable cash flow year after year from franchises like Call of Duty. Hit mobile games, however, are almost always one hit wonders that rarely have a popular sequel. Barriers to entry: Mobile games have much lower development costs than console games and enjoy easily accessible distribution platforms
luckbox asked New Constructs, an independent investment research firm powered by machine learning, to provide research on a gaming stock that they have a negative outlook on. The newconstructs.com platform, established in 2002, specializes in quality-of-earnings forensic accounting and discounted cash flow valuation analyses for public companies. The company’s research includes reports and ratings for more than 3,000 company stocks, 7,000 mutual funds and 650 exchange-traded funds. New Construct employees are restricted from purchasing or selling a security under consideration for inclusion in a New Constructs report, nor may they purchase or sell a security for the first 15 days after New Constructs issues a report on that security.
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GLUU
Ways to Get Short The implied volatility (IV) of Glu Mobile is ~55. That means the stock is expected to increase or decrease in price by 55% over the next year. By comparison, the IV of the S&P 500 is currently ~18. The IV Rank of Glu is above 50%—that implies that the stock is currently 50% higher than its average volatility. Several methods will achieve short exposure. Analysts at tastytrade provide some lower-risk alternatives to “naked” shorting the stock. Short Stock
Long Put
Long Put Spread
Probability of success
Roughly 50%.
The less paid for the in-the-money put option, the higher the probability. But generally considerably less than 50%.
Can be as high as 90%, but generally around 50% if the strike bought is higher than the current price and the strike sold is less than the stock price.
Capital required to initiate the strategy (in a margin account)
This is a “hard to borrow” stock. The shares may not be available to sell short.
The price of the put option...from 2% to 10% of the stock price depending on how far the option is out-of-the-money.
The price paid for the put spread. A spread placed at the current price is roughly 50% of the width.
Risk
Theoretically unlimited to the upside.
Limited to the amount paid.
Limited to the amount paid for the spread
Analysis
Avoid short selling “hard to borrow” stocks.
Avoid this lower-probability trade because A better use of capital. Probability it is theoretically impossible to increase of success and more limited loss. the odds of success to above 50%.
through the various app stores. Mobile game developers also compete with thousands of individuals and indie game developers to reach consumers.
INCONSISTENT REVENUE
Besides compiling a record of volatile revenue swings, Glu has rarely achieved profitability.
Those barriers to entry highlight another big issue for mobile game developers: No one really knows what makes a game succeed. When Glu launched Design Home, its current top-earning game, management expected the title to make a “minimal contribution” to revenue. If the company’s leadership couldn’t see that hit coming, what makes investors confident the company will follow it up with additional successful games?
IMAGES COURTESY OF GLU MOBILE
Irrational exuberance colors stock price Even though Glu has celebrated booms and weathered busts many times, investors seem to be betting that this time it’s different. To justify its current valuation of ~$8/share, Glu must achieve after-tax operating profit margins of 16% (current margins are 0%) and grow revenue by 15% compounded annually for the next eight years. Having 16% NOPAT margins is comparable to ATVI in recent years. Because Glu lacks many of the aforementioned competitive advantages that enable ATVI to earn those margins, it seems unlikely it would achieve that level of profitability. If Glu grows revenue at the same rate but earns just 8% margins, the stock is worth just $3 per share today, according to New Constructs modeling.
Source: New Constructs, LLC and company filings
Insider selling should alarm investors In the last year, Glu Mobile insiders have sold 2.9 million shares, or about 10% of the shares they hold. Again, this is reminiscent of 2014, when insiders also cashed out after the stock first spiked. Glu’s management can see that history is repeating itself, and investors should follow their lead. David Trainer is CEO of New Constructs, an independent equity research firm that uses machine learning and natural language processing to parse corporate filings and to model economic earnings. Sam McBride is an investment analyst at New Constructs. @newconstructs
Glu Mobile’s current money makers
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trends life, luxury & the pursuit of happiness
GAME THEORY
Esports Sensei
Move over math and science: tutors are teaching electronic gaming and making a living at it
By Vonetta Logan
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he American education system has become an arms race of intellectual achievement, with mentors, tutors and coaches pushing students to pursue perspicacity in fields as varied as math, science, creative writing and even competitive tennis and soccer. That fevered quest doesn’t leave much time for childhood pursuits, mindless hobbies and flights of fancy like video games. But in this new era, comes new insight, and the opening salvo in the de-stigmatization of video games came from an unlikely ally, a medical journal. “Surgeons who play video games are more skilled,” a headline blared in the Archives of Surgery. The writer cited a study indicating “a strong correlation between video game skills and a surgeon’s capabilities performing laparoscopic surgery.” Doctors who played video games, “made 37% fewer errors, performed 27% faster and scored 42% better,” the study showed. So, when patients are going in for surgery—a hernia repair, for example—they might want to ask the doctor, “Do you even game, Bro?” Next, gaming got the ambassador it needed, not the one it deserved. Richard Tyler Blevins, who sports a shock of electric blue hair and goes by the online alias “Ninja,” became famous as a professional Battle Royale player and streamer on Twitch. Blevins racked up wins nearly as quickly as he racked up endorsement contracts, and then word got out that he was making more than $500,000 a month. Some sources reported Blevins “earned nearly $10 million last year
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from donations, subscriptions, sponsorships and advertisements.” It led parents everywhere to the same conclusion: to prevent a child from playing video games in the basement as an adult, permit playing video games in the basement now. Those games include Fortnite, the juggernaut released in 2017 by Epic games. Fortnite players build worlds and battle zombies while also hitting fresh, and possibly copyrighted, dance moves. It swept the nation into a frenzy not seen since Pogs were introduced in the mid-1990s. But Fortnite is no Candy Crush Cakewalk. Players must learn nuances and techniques. The top earners in 2018 are playing a game called Dota 2, and have lifetime earnings that range from $800,000 to $3.7 million, according to Chron.com. Thus, the explosion of a cottage industry: video game tutors. That’s right, parents all over the world are paying tutors to teach video-game skills. Back in the day, one paid a college student for help in learning about molecular bonds. Now, aspiring gamers pay video game savants for help in learning how to waste zombies with the utmost efficiency. Dying of curiosity, a luckbox writer decided to speak with a video game tutor. The proj-
“One day there’ll be many, many millionaire video gamers”
ect began on a website called Gamer Sensei. The sleekly designed site featured pixelated squares in the banner, while large type proclaimed, “Take your game to the next level.” Under a heading marked “Featured Sensei” was the image of a young man wearing iridescent sunglasses and giant over-the-ear headphones. His haircut danced precipitously close to Bill Gates’ bowl cut territory. He went by the name Harry “DarZ” Darwin, Fortnite Sensei. OK, that’s a badass business card. The sensei’s online CV seemed impressive. “Competitive gamer for 10+ years, professional Fortnite player, 500+ hours coaching experience.” I created an account: “Hello, I’m luckbox69,” and hit the “schedule a lesson” button. It cost $16 for my hour with DarZ. Darwin called through Gamer Sensei’s Discord channel (think AIM chat room but for a new generation), and luckbox69 was taken aback by the posh British accent emanating from tiny laptop speakers. Learning it was a magazine interview instead of a lesson on how to rack up wins, he gamely co-operated. The London-based gamer/coach is 23 and has been playing video games since he was around the age of 11. But he’s very serious about coaching. Hearing him explain his coaching and curriculum, listeners might think they had wandered into a graduate-level seminar. He walks through a set process with all new clients. “OK, so very bare minimum what players are looking to get better at is massively different,” he says. “So, first of all, we’ll run through what’s called an edit course, and we can observe them
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RENDERING: COURTESY OF IGDB
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running through the course and get a really good feel for what skill level they are and to see if they can complete certain tasks.” He also takes into account their stats for wins, kills and levels. Darwin then tailors a course based on each player’s strengths and weaknesses. He says the age of his clients varies, “between 10 to 50. There’s no specific age. It’s really all over the place, and at the moment there’s more adults and a lot less kids.” Tutoring sessions constitute the first step on the road to improvement, but how long would it take under his tutelage for someone to become good? He explains that some of his students are looking to make money playing competitively, while others just want to see improvement. Students buy one-hour, three-hour or fivehour lesson packs ranging in price from $19.99 for an hour to $99.94 for a five-hour lesson pack. Just a little instruction can produce measurable results, Darwin says. His bio mentions a student who, “just qualified for Week 2 finals (Fortnite) and came away with $350 in prize winnings.” So there’s an example of ROI. Darwin is adamant about maintaining his teaching curriculum and having breaks between training sessions. He even gives his students homework. “I can teach them the mechanics and the ways to complete build- decisions and bad ones. “Then, I like to pull ing strategies in Fortnite, but there’s always up another video of how it’s done well—maybe homework given because it causes them to do one of my videos from a pro game or someone mechanics practice,” he says. else’s view—and look at that,” he says. “Then He chooses to coach rather than continue to we cross reference the two. Decision-making play at a professional level. “I feel in Fortnite, it’s in this day and age using visual learning is almost like being a professional athlete,” he says. super effective.” “A pro game career is very short, almost like So engaging players in the game and then being a soccer player. Your career is young when having them watch other people play the game you’re young. I’m going on 24 years old, my at a high level has been his recipe for success. reflexes aren’t as good. Also, I don’t have time It parallels an effective approach to learning to practice as much as the younger players.” to trade in the markets. He focuses his coaching talents on FortMeanwhile, more colleges are offernite and has become one of the pre-eminent ing scholarships to “e-gamers” and making coaches in the world. It’s his full-time job. esports part of the academic curriculum. He That can mean adjusting his says it’s a natural progression lessons as the seasons of Fortwhen a game like Fortnite offers a $100 million dollar nite advance, but the essence prize pool. “This growing of training remains constant. “Building and decision making market is still in the first five During a recent are the most important things years of the industry,” he says. week, video gamers that I coach and that never “It’s going to blow up without tuned into Twitch changes,” he says. a shadow of a doubt. When for a total of a company like Amazon Darwin teaches students buys Twitch (for a reported to become more effective hours. decision makers by watching $1 billion), you know Source: SullyGnome, this industry has massive recordings of their games with a Twitch statistics and analytics data provider them and pointing out good potential.”
216,248,558
Darwin is excited about Fortnite, a the future of gaming and wildly popular also his potential place video game in it. “Who knows, one developed by Epic Games, day there’ll be many, was released many millionaire video in 2017. gamers,” he says. Colleges are offering esports scholarships, and he plans to make himself available for college Fortnite coaching. These days, Darwin’s clients praise him. “Harry is a top lad,” one of his students says on the website. “Insane at the game and an even better coach... Highly recommended!” Darwin credits his success to growing up playing competitive soccer, football, and track and field, but he’s become more introspective with age and has made decisive moves to make sure he has time for self-care, travel, and hanging out with his friends. He still plays video games, and he’s competing in the upcoming Fortnite World Cup. But just imagine: Darwin has managed to land a real-life, long-term job as an esport Sensei. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
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THE NORMAL DEVIATE
Exploring the probability of just about anything
Sports Wagering on the Money Line By Tom Preston
E
xchange-traded option markets enable investors to play the role of a casino, taking the high-probability-of-winning side of a bet instead of playing a consistently losing game. But that doesn’t mean investors can’t learn something from Las Vegas. The money line bet may be the clearest, most-direct analogy to option trading. While point spread bets provide an opportunity to speculate on a winner’s margin of victory, money line bets enable speculation on pure winner or loser. How do they work? A positive money line is the number that a gambler could win by betting $100. A negative money line is the number that a gambler has to bet (risk) to win $100. A positive money line is for the underdog, and the negative money line is the favorite. Let’s take an example. During the last NBA playoffs when the Golden State Warriors were playing the Portland Trailblazers, one game had money lines of Golden State -330, Portland +270. Golden State was the favorite. If a gambler thought Golden State would win, he would have to bet $330 and if Golden State won, he’d win $100. If he thought Portland would win, he’d have to bet $100 and if Portland won, he’d win $270. (If a gambler wins a money line bet, he gets the original bet back plus the amount he wins.) In any bet, if the gambler can win more money than he wagers or risks, he has a less than 50% probability of winning. The reverse is also true. If he can win less money than he wagers, he has a greater than 50% probability of winning. Conveniently, money lines tell you the probability of a team winning. Here’s how. The Portland money line of +270 means a gambler would bet $100 to win $270. The probability that team will win the game is $100 / ($100 + $270) = 27%.
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The Golden State money line of -330 means (difference between the strikes of $200 minus a gambler would bet $330 to win $100. The the $70 credit). The probability of making probability that team will win the game is money on that trade is $130 / ($130 + $70) = 65%. Again, the probability of making money $330 / ($330 + $100) = 76.7 %. The number of losing events is divided by is greater than 50% because the investor is the number of losing events plus winning risking more ($130) than he can make ($70). events. OK, trick question. If losing events On that same $100 stock, buying the and winning events make up 100% of all 103/105 call spread for .40 debit, has the max the events, and in a game only one team will profit of $160 (difference between the strikes win, how come the probabilities derived from of $200 minus the $40 debit) and the max money lines add up to more than 100%? risk is $40. The probability of making money That’s the edge that the casino builds in to on that trade is $40 / ($40 + $160) = 20%. make sure it makes money no matter what. Not so great. The casino charges slightly more for a bet on This, then, provides a simple lesson on the favorite team, and pays slightly less if a picking high-probability trading strategies. gambler wins a bet on the underdog. In the Investors should accept that they can lose Portland and Golden State example, the prob- more money than they can make if they want a abilities add up to 103.7%. A more fair money higher probability of profit. That might sound line bet might be Portland +300 unsatisfying, but if investors trade high-probability strateand Golden State -300. Figure out those probabilities, and they gies consistently over time, sum to 100%. That extra 3.7% they should end up with more FLIP DECISIONS over 100% is an indication of winners than losers and a net In the NFL, profit, just like a casino. The how much edge the casino has 52.7% of in that bet. alternative is to make a series of So, what can investors learn low-probability “lottery ticket” teams winning from this? The way to derive trades that lose time and time the overtime probabilities from money line again. Assuming one doesn’t coin toss (and run out of money first, a big bets works for option strategies receiving) win like verticals, butterflies and winning trade can offset some the game iron condors that have defined of the losses, but not all. That’s Source: Charean Williams, max risk/max profit. Take the what the gambler does. Don’t be NBC Sports amount risked on the trade and a gambler. Be the casino. divide that by the amount of risk plus the amount the investor can make. That tells the probability that the trade will make at least $.01. For example, if the stock is $100 and an investor sells a 96/98 put spread for .70 credit, the max profit is $70 and the max risk is $130
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trends
FAMOUS FLIPS & OUTLIER OUTCOMES
PHOTOGRAPHS: (VALENS) PHOTOFEST; (SECRETARIAT) WIKIPEDIA; (JOHNSON) REUTERS/MPTV
THE DAY THE MUSIC DIED
Richie Valens, the Mexican-American singer and songwriter, became one of rock music’s first Latino stars and wielded considerable influence in the Chicano rock movement—all by the age of 17. That’s how old Valens was when he boarded a bus with a galaxy of stars that included Buddy Holly, Dion and the Belmonts, and J.P. “The Big Bopper” Richardson. They were set to play 24 concerts in the Midwest. On Feb. 3, 1959, they were scheduled to perform in Moorhead, Minn. But they were having problems with their tour bus in Clear Lake, Iowa, so Holly chartered a plane that could hold a pilot and three passengers. Holly took one of the passenger seats. The Big Bopper boarded the aircraft in the second passenger spot, which had originally been reserved for Waylon Jennings who was playing bass for Holly. Holly’s guitarist, Tommy Allsup, and Valens flipped a coin for the third seat. Valens called heads and won. Pilot Roger Peterson was at the controls. The plane took off late at night in wintry conditions and flew only five miles before crashing in a cornfield. Everyone aboard perished. The tragedy was memorialized in Don McLean’s 1971 song American Pie.
SHOULD HAVE KEPT THE COLT
Fans view the Phipps family as royalty in the horse-racing world. But after owning the beloved Seabiscuit in the 1930s, the Phipps clan passed up an opportunity to own Secretariat, the horse who won the Triple Crown in 1973. How? The Phipps family won a coin toss but chose the wrong horse . Dinny Phipps had made a deal with Chris and Penny Chenery to mate Bold Ruler, a Phipps family stallion, with two Chenery mares, Hasty Matelda and SomethingRoyal, according to newspaper reports. Phipps and his father had already decided they would bypass a colt because they wanted “the best female horses in the country.” The two families flipped a coin to see who would get the firstborn. The Phipps contingent won and chose a filly, a female horse, from Bold Ruler and Hasty Matelda, and named her The Bride. The colt, a male horse from Bold Ruler and SomethingRoyal, went to the Chenerey family and was named Secretariat. Secretariat became the 9th Triple Crown winner, setting records for each of the three races in the series. In his most outstanding performance, Secretariat shattered the 1 ½-mile world record on dirt in the Belmont Stakes at 2:24— a time that still stands as the best ever. He won the race by 31 lengths, another unbroken record. In fact, Secretariat’s performance at the Belmont Stakes was rated second on ESPN’s list of the top 100 greatest individual sports performances ever, ranking only behind Wilt Chamberlain’s 100-point game. The Phipps family could have owned what was arguably the greatest racehorse in history.
DUNK DYNASTY
During the 1978-1979 season, the Chicago Bulls finished last in the Eastern Conference, which qualified the team for the coin flip for the No. 1 college draft selection for 1979-1980 season. It had become the NBA’s custom to allow the two teams with the worst records in their conferences to flip for the right to choose the player they wanted most. In the West, the New Orleans Jazz had finished last but had traded the privilege of the coin toss to the Los Angeles Lakers. The Bulls called heads and it came up tails. The Lakers chose Earvin “Magic” Johnson Jr. after his sophomore year of college. Magic Johnson won five championships and was selected as an All-Star 11 times with the Lakers. He played point guard/forward for 13 seasons with the Lakers wearing the No. 32 jersey. The Bulls got Dave Greenwood, who played 12 seasons in the NBA and was considered a marquee player for the Bulls before the Michael Jordan era. Greenwood later played for San Antonio, Denver and Detroit.
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WELLNESS
Beyond Beyond Meat The IPO’s 163% gain presages a tectonic shift in American views on food and health By Carter Williams
Consider what was happening in those days. Judge Harold H. Greene had just set in motion the breakup of AT&T in 1982. Some Americans were still talking on partyline phones. Most still rented their handsets from the phone company. Telcom was on copper. Signs inside the Bell System read: There are two giant entities at work in our country, and they both have an amazing influence on our daily lives ... one has given us radar, sonar, stereo, teletype, the transistor, hearing aids, artificial larynxes, talking movies and the telephone. The other has given us the Civil War, the Spanish-American War, the First World War, the Second World War, the Korean War, the Vietnam War, doubledigit inflation, double-digit unemployment, the Great Depression, the gasoline crisis, and the Watergate fiasco. Guess which one is now trying to tell the other one how to run its business? By the end of the ‘80s, AT&T wrote off $6.8 billion in infrastructure as the world moved to fiber and wireless. Cisco, Microsoft, MCI, AOL and McCaw emerged. In the 35 years since, information services have expanded 100-fold. Entirely new markets have formed. Fast forward to today. American farmers are stuck in a rut, squeezed on price by commoditization and stuck in a corner because of a trade war. What’s on their minds? “How do I de-commoditize my market?”
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is the question many of them would like to answer. But if everyone buys the newest genetic crops from Monsanto, the company increases supply and drives down price. And farmers who grow a differentiated product, like organics, still sell to the same grain elevator.
Guests join Ethan Brown, founder and CEO of Beyond Meat, to ring the opening bell in celebration of the company’s IPO at Nasdaq in New York on May 2
PHOTOGRAPHS: (NASDAQ) REUTERS/BRENDAN MCDERMID; (BURGER) COURTESY OF BEYOND MEAT
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hen shares in Beyond Meat Inc. (BYND) rose to 163% of their IPO price on the company’s first day of trading on Wall Street, it meant more than just a bonanza for the company’s new stockholders. It meant the investment bankers who took Beyond Meat public failed to understand the new food system. The bankers didn’t recognize the market’s hunger for healthier food, so they left more than half of the company’s value on the table. This kind of IPO pricing surge hadn’t occurred in more than 20 years—not since back in the ‘90s when spikes in internet- and telecom-related company stock prices created the dot-com bubble. Spikes occur when the incumbents don’t understand rapid changes in the market. So, let’s examine a bit of history because the telcom boom bears similarities to what’s ahead in food and health. Last October, Chris Andersen sat down for an interview in his New York office. Anderson belonged to the core team at Drexel Burnham Lambert, working alongside Michael Milken, who’s know for helping to originate high-yield bonds. Although now in his 80s, Anderson still works as an investment banker and had just finished reading the book Sugar: The World Corrupted: From Slavery to Obesity, by James Walvin. That led him to tell me the story of the first big Milken offering of $1.1 billion in junk bonds to underwrite MCI Advertising in 1982. It was the largest junk debt offering of its time.
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PHOTOGRAPH: COURTESY OF BEYOND MEAT
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Whether the market is a monopoly like AT&T pre-1982, or a near monopsony for ag products made up of ADM, Bungee, Cargill and Dreyfus (ABCD), a handful of people are setting price and innovation comes to a halt. Innovation happens when the consumer’s voice influences products. Milken, one of the smartest investors ever, underwrote $1.1B in telcom in debt because it unlocked the size of the market. When MCI began offering wireline services in different bundles, it revealed the size of the market to entrepreneurs. Milken revealed latent demand. With that information in hand, Milken led the 80’s underwriting of the explosion in information technology. Similarly, Beyond Meat gave the world a glimpse of unmet investor demand. The food/ag market is operating circa 1985. Amazon represents a proxy for MCI. While some debate Amazon’s ability to scale or question the Indigo Ag business model, it doesn’t matter if those two companies survive because their reshaping of the market will drive food system innovation for the next 50 years. Why? Because Americans do not eat well. They spend about $1.5 trillion a year on food that’s heavy on carbs and sugar. Carbs are cheap and some claim sugar is addictive. To invest in food innovation requires addressing the high cost of good food and the problem of sugar addiction. Milken would say: “Understand latent demand, expose that demand to entrepreneurs and watch the market adapt.” That harkens back to Anderson’s Yoda-like lesson, which spawns two thoughts: 1. The size of latent demand is the substitute cost Americans spend on healthcare costs for diabetes, cancer and other problems traceable to poor nutrition, which comes to between $500 billion and $1 trillion annually; and 2. Innovators should make good nutrition more addictive than sugar.
If people want to live to 120 and reduce the cost of healthcare, it would require reaching those two goals. Up to $1 trillion is available to the innovator who moves a healthcare dollar to good food. In the meantime, innovation can de-commoditize farming and attract more capital. Remember that AT&T seemed great until it was broken up. Then innovators revolutionized telcom beyond imagination. And what’s the future of ABCD? AT&T figured out how to adapt and grow. It just took external innovation to speed things up. Goliath needs David. In fact, a smart Goliath creates a David. That brings an influx of capital. Similarly, a huge shift is occurring in food: Millennials want high-quality food and aren’t bothered by genetically modified, or GMO, foods. They will be fine with gene-editing because they see gene-editing curing their parent’s cancer. The general consensus on market demand is wrong. The solution is to lower healthcare costs by offering better-tasting healthy food. About 60% of people base purchase decisions on price. Innovators bring the cost of good food below the cost of bad food. Lower prices expand demand. C onsumers of the future will choose food not because it’s GMO or non-GMO. They will pick foods based on health, fair trade, absence of fertilizer, pro-biotics and 23andMe genetic tests. Sugar is becoming the new tobacco. Soon, someone will bring a class action suit against the consumer products goods industry because of sugar-laden food. Companies that offer that kind of food could wind up paying for the healthcare costs of diabetes if the plaintiffs win.
And while markets may seem slow to change, the law of accelerating returns teaches that in the long run change will exceed everyone’s wildest dreams. Beyond Meat represents an early market signal. More are on the way. It’s a complex market, but it will reveal itself the way telcom did in the ‘80s. Incumbents will adapt as they did then. Spending on healthcare will decrease and spending on better food will increase. Food and health will not get 5% better—they’ll be 10 times better. And somewhere along the line the bankers will figure out how to price arbitrage. For now, unfortunately for most investors, the alpha is in the private market until the public market learns to price the opportunity. But keep a close watch because these changes are happening quickly. Looking back in 10 years it will seem obvious that the nation was choosing the path to better health.
What’s ahead in food and health may resemble the ‘80s telecom boom
Beyond Meat gave the world a glimpse of unmet investor demand
Carter Williams is managing director and CEO of iSelect Fund, a venture fund focused on the convergence of agriculture, food and health. @jcarterwil
Those facts and predictions are based on the work of innovators and startups that are sending the first signals of a changing market.
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SOMETHING VENTURED
Swimming in Sales
Relentless ambition turns a solo act side hustle into a multi million-dollar business By Rocio Villaseñor & Ed McKinley
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dream job wasn’t enough for Emily Vaca—she always had a part-time entrepreneurial project underway, too. Eventually, the St. Louis native who became a Chicago transplant hit upon a side hustle that fit her so well that it grew into her fulltime pursuit. In fact, her startup expanded by 1,500% last year and looks to explode by more than 3,000% this year. Vaca discovered her life’s work on the rooftop deck of her apartment building. Her desire for a swimming pool light enough that it wouldn’t fall through to the floors below led her to design, manufacture and market an
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inflatable model. It’s not a little kiddie pool with cartoonish embellishments. Instead, it’s big enough for grown ups and attractive enough to suit sophisticated tastes. But MINNIDIP didn’t happen overnight. Vaca came to the Windy City 15 years ago to pursue a bachelor’s in art and design at DePaul University. The day after she graduated she began working at an agency where she helped breathe life into brands by producing TV commercials and designing everything from logos to packaging. Clients included Anheuser Busch, Goose Island, Kraft Foods and General Electric.
Vaca’s creative bent came naturally, almost by inheritance. Her mother created studio art and lettering. Dad urged her to study law but actually nudged her toward following him into graphic design by teaching her Photoshop in the 7th grade. She even flirted with singing and songwriting in high school. Creative drive fueled Vaca at work and in her sidelines. For years, she’s scrimped on sleep, waking at 4 a.m. to freelance or create her own businesses before showing up for a hectic day at the office. “I live off of coffee to this day,” she admits, adding that entrepreneurs have to be self-starters driven to search for more than a 9 to 5 job can provide. In 2012, Vaca started a business called “Sugar & Gold,” which combined her father’s nickname for her with a symbol for the precious results she sought. The name changed to “La Vaca” because it seemed more “ownable” and incorporates her married name—even if it does translate to “cow” in Spanish. The business centered on weddings, providing designs for everything from invitations to hand-made piñatas. She even started a blog to share ideas and projects she used in her own wedding. La Vaca services also include creative direction, art direction, product design, content creation, styling, branding, photoshoot styling, website design and help with invitation suites. Nothing’s wrong with those design-house businesses, but a lot of people engage in them. Vaca wanted to be first to market with a product. And she dreamed of seeing something she designed find a place on the shelves of one of her favorite stores: Target. Like so many designers, she’s enthralled by the Target look. “I’m obsessed with Target,” Vaca says. “I spend at least three days a week there. I wanted (my product) to be something I would want to see there when I walk the aisles as a customer.” But what would Vaca offer Target? Then it came to her. Even though she hadn’t grown up on a farm, she had fond memories of soaking in an outdoor metal tub designed to hold water for livestock. But her husband cautioned her that a metallic tub filled with water might test the strength of a Chicago roof. So she decided to design an inflatable pool that she’d be proud to display when entertaining friends. Once she thought of it, it seemed obvious. “How is this not being done yet?” she asks when she looks back. Thus began a two-year search for a manufacturer willing to take on the project. Secrecy demanded that Vaca avoid companies that already manufactured pools because they could pre-empt her idea and beat her to
PHOTOGRAPHY COURTESY OF MINNIDIP
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market. Other manufacturers either laughed off her project or admitted they weren’t capable of pulling it off. “Nobody in the U.S. would do it,” she recalls, noting that companies she contacted wanted to work on medical equipment or defense contracts. Finally, Vaca found a manufacturer with operations here and abroad to take on the pool project and get her to market with a soft launch in 2017. That helped prove there was a market before approaching retail buyers. She later moved on to another overseas manufacturer that could handle the job. Vaca was savvy enough to know she had to determine which departments were appropriate for her pools at her No. 1 store choices, Target and Bloomingdale’s. That way, she’d be talking to the right buyers. Her expertise in television, photography and design yielded product shots that piqued the interest of the buyers, and her email messages to buyers showed the appropriate understanding of branding and affection for the stores. She was speaking the right language—visually and verbally—to find coveted space in big name stores. And Vaca had the right product to sell. Her pools fit the design-conscious ethos of Target, and her premium line matched the style esthetics of Bloomingdale’s. And the store buyers soon learned they were talking to the right person. Buyers weren’t spending time with a sales rep. They were communicating with the designer who had made ideas a reality. After working on MINNIDIP for six months, Vaca quit her job at the agency and went fulltime with her company. She had launched the business with loans from family and friends and managed to retain full ownership of her enterprise. Understanding the underlying accounting of the business helped ensure the fledgling company had the financial backing to sustain it. “As soon as I quit, it really was a gamechanger,” Vaca maintains. “I could focus and everything opened up really quickly and I could scale so much faster. You have to go in like this is it. It’s going to happen.” Last year, Vaca added lines of beach balls and swim rings with festive confetti inside. “It’s really easy to party with these products,” she notes with a smile. Rocio Villaseñor is an editorial assistant at luckbox magazine. She holds a master’s degree in journalism from Columbia College Chicago.
MINNIDIP founder on tastytrade’s Bootstrapping in America
INFLATABLE GROWTH 2017: 500 pools sold
MINNIDIP™ Signature Collection 5.5 feet wide, 1.5 feet tall Fits up to 3 adults Soft-touch durable non-toxic vinyl Several styles (“Dipped in Ink” pictured) target.com, $39.99
2018: 2,800 pools and accessories sold 1,500% revenue growth 2019 (est.): 135,000 pools and accessories sold 3,025% revenue growth
MINNIDIP™ Premium Tufted Collection 6 feet wide, 1.8 feet tall Fits up to 4 adults Soft-touch durable non-toxic vinyl Several styles (“Terrazzo” pictured) Minnidip.com, $80
BIRTH OF A PRODUCT LINE MINNIDIP, the first designer collection of inflatable swimming pools for grownups, has grown from nothing into a multimillion dollar undertaking in just two years, thanks to founder Emily Vaca. She knew she’d enjoy entertaining friends in and around a pool light enough to adorn the rooftop of an apartment building but serious enough to appeal to discerning adults. Apparently, consumers and retailers think the same way. More than 100 stores nationwide are carrying her pool and pool-related products, which range in price from $39.99 to $80.00. Some of the larger U.S. retailers that offer her wares include Target, Bloomingdale’s and American Eagle Outfitters. In Canada, Indigo sells her products. Independent boutiques and smaller department stores across the country are also displaying the pools. So far, sales on the MINNIDIP website account for 10% of the company’s volume, with 90% flying off the
shelves of bricks-and-mortar stores, according to Vaca. In 2017, the company sold 500 pools, but sales volume rose to 2,800 units last year, when pool accessories joined the lineup. This year, the company had manufactured 135,000 units before the end of May, a figure that reflects the number shipped to retailers and those still in her inventory. Designing and marketing the pools came naturally enough to Vaca, who came of age in the advertising business. But naming her creation almost stumped her. Working from a list of 500 potential monikers, she sweated out the name game for three months. “MINNIDIP kept coming up,” she says of the naming challenge. “I started to think about the branding and what I loved most about MINNIDIP, she recalls. “I decided to go with it (because) it worked as a noun and a verb, which I think it is very important when you think about branding a
product.” Another slant on the name MINNIDIP also appealed to Vaca. “It is a play on the phrase ‘skinny-dip,’” she says, noting the double “N.” The first three designs for the pools were called “That’s Bananas (Leaves), Just Add Water(melon) and “Donut Forget Your Sunnies.” Seven designs didn’t make the cut and thus weren’t produced. Currenty the signature pool collection has seven designs. Now, the MINNIDIP collection has expanded to the pool party aids that are becoming available this summer at Target stores and online at MINNIDIP. COM, along with the other independent boutiques and stores. They include inflatable coolers, beverage coolies, beach balls, inner tubes, towels, balloon garlands and party invitations under $26. MINNIDIP also has a new Tufted collection with 3 designs that will be sold at Bloomingdale’s and selected retailers for $80.
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ARTS & MEDIA
TRADING SARDINES Certain souls become passionate about trading. Market dynamics fill them with adrenalin, feed their competitive urges and sometimes pad their bank accounts. They’re glued to their screens, searching for an edge, trying to take home a profit and hoping to avoid a loss. The game is pure and simply fascinating. Like life itself, the markets blend highs and lows, ups and downs, achievements and failures. For some, trading becomes a life’s work, a rewarding profession shared with other professionals. Through tens of thousands of market positions and uncountable hours of analysis, they develop relationships with other traders that become part of a remarkable life story. Trading may not provide a pathway to enlightenment, but the grit, intention and willingness to take a stand and face the consequences combine to create an impressive way of looking at life. Those factors can also provide the backdrop for a very fine book. In Trading Sardines, Lessons in the Markets from a Lifelong Trader, author Linda Bradford Raschke describes the events that brought her into the world of the trade 40 years ago. As the years turned into decades, she witnessed unprecedented cycles of boom and bust and survived the profession’s transformation from the trading floor to the computer screen. Raschke got her start as a floor trader in the pits of the Pacific Stock Exchange, keeping an eye on the ticker tape and bidding against wise old market makers. As technology and market dynamics changed, she persevered to become a successful and prominent trader.
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Her personal history makes for a fascinating story, and she tells it in a vivid style. It’s a saga of how great trades can come together or fall apart, teaching readers lessons in trading and in life. The author has researched the book extraordinarily well and written in a conversational mode that draws the reader in as she reveals trading methods and shares advice and commentary from a cast of professional traders she cultivated and collaborated with through the years. Raschke says best practices in trading come down to fundamentals like the thoughtful use of analytics, gaining a sense of context through experience and avoiding trades so big that it’s hard to get out. There’s a recognition that, in trading, it all comes down to supply and demand: know when to be in and when to get out and what side to be on. On the other hand, as the book makes clear, succeeding as a trader takes more than simply following maxims and tips. It requires deep insight into the market and the ability to read both the broad and subtle signs it communicates. What’s more, traders need to learn the lessons life teaches. Raschke tells the tale of a personal bodybuilding trainer whose wise counsel about becoming and staying fit translated to trading the market. Here’s what the author took away from sessions with the trainer: “When you do proper homework and preparation at the end of each day, you are in a stronger position to start the next day. The first few successful trades give you a taste of the satisfaction gained in running a well thoughtout program. This, in turn, increases the incentive to continue to eliminate the distractions and
waste time engaging in frivolous activities.” The trainer’s wisdom doesn’t end there. Raschke distills more of the teachings: “The person who starts to follow a consistent trading program will set higher goals. Stick with the basics, follow a methodology, be consistent, concentrate on your form, keep records of your progress, and above all practice positive thinking. “ The book is an engaging read by a dedicated trader with boundless intention to succeed. The author expresses deep respect for colleagues who taught her so much, and she loves the business that has rewarded her greatly. It’s also a personal history that provides insight to traders who weren’t around before the cascade of changes in the 1980s. It also describes what’s important about the present and predicts what the future may hold. What’s most significant are the “lessons in the markets” woven from her dedication to her craft and her full real life. That’s the theme that will speak to any trader. They’re the lessons that are most meaningful to those of us who love the work. — Mike Hart, tastytrade @mikehart79
TRADING SARDINES
4.5 out of 5 A mashup of memoir, recent economic history and trading wisdom that any investor would relish
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THE BUSINESS OF ESPORTS “The fastest-growing entertainment phenomenon of this generation.” That’s how the hosts of The Business of Esports podcast—William Collis, Paul Dawalibi and Arda Ocal—characterize professional video gaming. Their podcast sheds light on what’s happening in esports and outlines possible strategies for the business. The success of The Business of Esports is rooted in the broad nature of its subject. Each hour-long episode is filled with varied esport conversations, keeping discussion points hot and refreshing. One moment the hosts are assessing public sentiment in the esports community and the next they poke fun at a tweet by Meek Mill, a rapper planning to invest millions in a new esports team. Each week, the team of hosts unveils niche and untouched sectors of the competitive gaming
realm so the audience might take advantage of potential opportunities. As the co-founder of a notable gaming company, Collis offers a unique perspective on the world of competitive gaming. In 2016, he helped launch Gamer Sensei, the world’s largest esports coaching education platform. He went on to co-found a prominent esports team known as Team Genji. Host Paul Dawalibi, a seasoned gamer and entrepreneur, serves as CEO of Conquest, a marketing agency for brands looking to get involved in esports. Ocal, the third host, is a broadcaster based in New York and serves as a buffer between Collis and Dawalibi, prompting them with questions and redirecting the conversation when it gets too heated. The hosts provide a candid analysis of the risks and rewards of getting involved with gaming companies and teams. In Episode
ICON: (VIDEO) THE NOUN PROJECT
COMPLEX CON(VERSATIONS) With so many films and TV shows documenting the triumphs and struggles of pro gamers, it can prove difficult to mine them all for advice to apply in the everyday business of esports. While movies like Free to Play or ESPN’s docuseries Good Game reveal an impassioned side to esports, Episode 8 of Complex’s 16-part series Complex (Con) versations emerges as a nice fusion of the life of the gamer and the inner workings of the esport business. Appropriately titled The Business of Esports, Episode 8 presents a panel of five high-profile figures connected with the sport. The series, which is available on the company’s website, was filmed live at its 2016 ComplexCon convention. Host Imari Oliver, vice president of Esports WMEIMG, a sports and media talent agency,
dismantles misconceptions about esports in a colloquial and forthright manner. Sharing the stage with Oliver are Tobias Sherman, global head of esports WME-IMG; Jace Hall, American video game producer; Christopher “Montecristo” Mykles, League of Legends analyst; and Steve Aoki, DJ and co-owner of Overwatch Team Rogue. The panel set aside half an hour to relate personal experiences and grapple with timely esports topics. Their conversation reveals just how interconnected other industries, like music and fashion, have become with esports. Aoki, for example, joins the likes of other esports entrepreneurs, like Shaquille O’Neal and Mark Cuban, who made their names in fields other than professional gaming. (See page 16 for more examples.) As gaming continues to become part of the fabric of American life, the industry should expect more involvement from curious
THE BUSINESS OF ESPORTS
4 out of 5 Informational and lively conversations regarding the intersection of business and pro gaming
15, Collis and Dawalibi weigh in on what companies they believe would make good investments. Although Goldman Sachs (GS) analyst Michael Ng suggests Take Two Interactive (TTWO), Zynga (ZNGA) and Activision Blizzard (ATVI) are among the wisest esport stock picks, Collis takes a stand against his case, arguing that Zynga should be dropped from the category and Activision represents the future. In an industry that’s unfamiliar but growing quickly, investors would be wise to pick up a pair of headphones, type in The Business of Esports and press play. —Jessica Christoffer
COMPLEX CON(VERSATIONS)
3.5 out of 5 A candid, straightforward exploraton of the minds of gamers and gaming entrepreneurs alike
investors ready to cross over from other sectors. Those newcomers are attracted partly because of some utterly mind-blowing aspects of the industry. They’re the kind of quirks aired in Complex (Con)versations by cast members like Montecristo, who rattles off the differences between the APM of pro gamers and amateur gamers. (See pg. 44.) Access to that kind of knowledge gives viewers a look at both sides of the equation— the esports business model and the mindset of professional esports players. —Jessica Christoffer
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L U X U R Y P E R F O R M A N C E P A S S I O N
Custom Outdoor Kitchens by Kalamazoo
888 340 4361
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kalamazoogourmet.com
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FINANCIAL FITNESS
What Zelda Teaches About Trading Dr. Jim finds a Link between video gaming and options trading By Jim Schultz
IMAGE COURTESY OF NINTENDO
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oday’s players don’t have a clue about true gaming. They’ve never toiled in the original Legend of Zelda’s sea of frustration, searching in vain for the secret passage to the next dungeon. They haven’t scanned the same rocks and bushes repeatedly before calling the Nintendo Hotline for help. The stress. The struggle. The strife! But today? Any gamer saddling up for the recently released Legend of Zelda: Link’s Awakening deals with a roadblock for no more than 18 seconds before googling for help. Then, the next six steps are autocompleted and clearly outlined in the search bar without Link even breaking stride on the screen. The injustice. In any event, whether it’s old-school 1994 Zelda or new-school 2019 Zelda, role-playing games (RPGs), are a special breed. Players escape reality as they create characters, hone skills and overcome obstacles. Little wonder that fantasy games have been a generational favorite. And the best part? The learning that takes place inside a gaming console doesn’t have to become irrelevant when the game has elapsed. That knowledge counts when it’s transferred to physical training. It’s live. It’s a real-time RPG, where progress is palpable and setbacks sting. It’s not dragging Link out into the fields to beat up on some Bubbles just to stockpile enough Rupees to
snag a new sword. It’s rolling onto the rubber mats to beat up on some dumbbells—to stretch the muscle fibers beyond their limits and force hypertrophy. It’s strapping into the Lifecycle Bike to blast through some intervals. It’s analyzing macros and studying calories to become better. Faster. Stronger. Leaner. Better. It’s not a fantasy world where failures are erased by a swift tap of the reset button, and it’s not a fictitious game where successes float off into the darkness that is cyberspace. It’s real life, where potential is unlocked and barriers are smashed. The end game is in the eye of the beholder, and the sky’s the limit. There’s no last dungeon to conquer or final boss to beat. It’s an ongoing application of kaizen—the Sino-Japanese word for improvement. And in that way, is it any different from trading? A new trader is like a young Link in the Original. Naive about options, without a thought about what’s really going on. Simply building a Watchlist of stocks or opening a vertical spread is a big victory. But as time goes by, just as Link graduates from struggling through a Bubble showdown to comfortably warding off some Wizzrobes, new traders become not-so-new traders. They gain experience, become seasoned and grow mature. Building a watchlist morphs into scanning for
high-volatility stocks, and executing a vertical spread evolves into closing a profitable short strangle. Time in the markets begins to show a correlation with trade success, and volatility no longer promote headaches but instead presents opportunities. And like Link starting to find his way, once he’s notched a couple of dungeons and taken out a few of Ganon’s henchmen, a trader settles into a rhythm. Doors are no longer hidden and passageways are no longer secret. Instead, the pathway forward to rescue Zelda becomes clear. Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3
Swinging a sword in Legend of Zelda: Link’s Awakening.
A trader settles into a rhythm … doors are no longer hidden and passageways are no longer secret july 2019 | luckbox
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THE POKER TRADE
Four Tips to Winning Poker
Players have a choice: Constantly hone their tactics or plunge into an abyss of losses By Jonathan Little
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oker’s a tough game, and players who aren’t constantly improving their skills risk becoming perpetual losers. So, don’t let that happen! If applied intelligently, the following four tips will ensure a player can stay competitive. Even players who find these tips familiar will benefit by having them brought back to the front of consciousness. Think about an opponent’s ranges Players who routinely put an opponent on one specific hand are certainly playing poorly. As a simple example, if a tight player raises from first position, an opponent should not put him squarely on A-A, A-K, or any other specific hand. Instead, put him on a range of hands, perhaps A-A, K-K, Q-Q, J-J, and A-K. A player can then narrow that range as the hand progresses based on his actions on the flop, turn and river. If a player puts an opponent on one hand from the start, he will make significant blunders due to simply not assessing each situation properly.
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Stop continuation betting with 100% of the range Players should continuation bet nearly 100% of the time. While this advice was spot-on a few years ago when people were folding too often, in today’s games, a player should
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tone down the continuation bet a bit. You should “check” when the board does not favor the range, when holding absolute trash, when holding a marginal made hand that cannot withstand significant aggression, and when failing to connect with the board. That being said, you should still continuation bet much more often than most players because even today, most players fold too often.
(The next tip allows bets to stay profitable even with high continuation bet frequency.) Double and triple barrel more often Most people now know to call flop continuation bets with a somewhat wide range of made hands, draws and the occasional hand that has only a little potential to improve but
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will have lots of bluff opportunities. They also know to call the turn with any sort of made hand or reasonable draw. However, when players fire out a sizable river bet, most typical opponents usually give their opponents credit for a strong hand. So, don’t be afraid to get out of line and make a sizable bet, especially when there is little to no chance to win at the showdown. Of course, if a specific opponent calls down A value bet occurs with a junky hand, when you put your reverse this advice and opponent on a value bet relentlessly on hand, and yours is better. Estimate all three streets, extracthow much your ing maximum value opponent may be with marginal made willing to pay you hands like a top pair with that hand— with a bad kicker. then make that bet.
Study the 4 players who win Besides spending time studying the world-class players, study the best players in the games you are playing. Every time a player sits at the poker table—especially a small or middle stakes player—he will be engaging with players who are better. Study the plays they make that allow them to win. Make a point of incorporating those skills into a strategy. As a player moves up, he finds that some of the plays that worked in the smallstakes games don’t work in higher-stakes games. If a player’s mind is wandering while at the poker table, time is not being used wisely. Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 14 best-selling books and teaches at PokerCoaching.com. @jonathanlittle
Don’t be afraid to make a sizable bet when there’s little or no chance to win at the showdown
WHEN NOT TO CONTINUATION BET Instead of automatically continuation betting with the entire range in heads-up pots, take a moment to consider how the board connects with an opponent’s range. If it connects well, check with many marginal hands that do not mind getting closer to the showdown, as well as some junky hands that have little to no potential to win if a player bets and gets called. Suppose a player raises from middle position and the big blind calls. The flop comes 7 6 4 . The opponent checks. Assuming a player is raising with a reasonable range from middle position, he should not have many premium hands on this flop besides 7-7, 6-6 and 4-4. However, an opponent’s big blind defending range contains many premium hands, including straights, three-ofa-kinds and two-pairs. In that situation, the big blind is said to have the “nut advantage.” When an opponent has the nut advantage and a player does not have the range advantage, do a lot of checking, especially with hands that have showdown value but really don’t want to get raised. In that situation, even over pairs like J-J are not in great shape if they get check-raised, so consider checking this flop with most of the range besides with absolute best made hands as well as a few marginal flush draws and open-ended straight draws. By playing in that way, when a player bets he will have plenty of premium hands that do not mind action as well as draws that do not mind folds, and when he checks, an opponent has no way of knowing if the player plans to fold to turn and river aggression. By making it difficult for an opponent to know where one stands, a player gives an opponent the opportunity to make mistakes, and when an opponent makes mistakes, a player makes money.
Range is an estimation of the possible cards an opponent may be holding, based upon the player’s prior play and betting pattern. The equity (value) of one’s own hand comes from the chances it has to win against the range of the opposition. july 2019 | luckbox
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TRADING PIT
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Favorite book 5
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Birthplace Long Island, NY Age 43 Office Location Manhattan Years trading 22 years (10+ as a pro day trader)
WHAT’S THE DIFFERENCE BETWEEN A CASUAL GAMER AND A PRO? 44
1 My email; it’s always open. 2 Trade Portfolio Manager that gives real-time updates and
profits and losses on every trade in every The Adam Mesh Trading Group portfolio
How did you become interested in trading? I was attracted to the control aspect. The outcome, success or failure, was in my hands and not subject to opinion. The opportunity to have immediate gratification and a high level of success early on were also appealing!
3 tastyworks trading platform
4 Dunkin Donuts: Almond milk latte, extra almond milk 5 iPhone X Plus
Favorite options trading strategy A diagonal calendar trade with a little twist. It starts off as a directional call or put and ideally is sold for a nice profit. However, if the trade stalls, I begin collecting premium each week to finance the trade and ideally profit from being a landlord!
6A pple Watch
REMINISCENCES OF A STOCK OPERATOR
7 Bose wireless headphones
By Edwin Lefèvre
8 Calculator
$27.52 (Amazon)
Average number of trades per day? 10 to 15 What percentage of your outcomes do you attribute to luck? Less than 3%. I believe luck is when preparation meets opportunity, and I work hard to be prepared.
Publisher: Wiley (2009) Hardcover (448 pages)
Favorite trading moment My favorite trading day was when a writer from Fortune magazine came to watch me trade and I made over $19,000 in 20 minutes. It was nice to have a witness and the article was a nice plus when I was a single guy living in NYC!
“Huge difference obviously. It’s like asking what’s the difference between Lebron James and the guy down in the street in a pick-up game, right? It’s a hugely different set of skills. A lot of it is dedication to the craft—research, film watching, and drilling over and over and over again until it gets into your muscle memory. People think about video games and wonder how you can be professional. At the top tier, there’s a metric that we use in esports called actions per minute, and some of the top players in the world are in 300 to 400 actions per minute. That means they’re doing a mouse click or a keystroke five times a second. And they’re doing this for a 20- to 30-minute-long game, and they’re practicing this game for 10 hours a day. So, that level of focus, that level of speed is exceptional. There is a massive difference between your brother picking up an Xbox controller and a top-tier esports pro player.” —Question asked of Christopher “Montecristo” Mykles, a League of Legends analyst and esports consultant at ComplexCon, February 2017. (See “Complex Con(versations)” pg. 39.)
PHOTOGRAPH: WILLIAM BADILLO
ADAM MESH
7
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CALENDAR
ROUGH SAILING IN JULY
JULY 2 Total Solar Eclipse 4–7 European Games Week Summit & Festival Dublin, Ireland
An astro-advisor predicts July market activity will bring new lows in stocks and new highs in commodities By Susan Abbott Gidel 6–28 Tour de France
PHOTOGRAPH: (TOUR DE FRANCE) REUTERS/BENOIT TESSIER/FILE PHOTO; (COMIC CON) REUTERS/MIKE BLAKE
T
he first half of July could be rough because of two eclipses, each of which is connected to three celestial bodies in the July 4, 1776 horoscope for the United States—the Sun, Mercury and Saturn. These three orbs represent the country’s identity (Sun), its youth and news media (Mercury) and its self-designated role as world cop (Saturn). In addition, transiting Saturn and Pluto— working together to put rules in place that transform business and government—are pressuring those same three orbs. The July 2 total solar eclipse (visible in the South Pacific, Chile and Argentina) is part of an eclipse family that began in 991 and ends in 2235. The eclipse family’s meaning focuses on excessiveness in news that’s transformative. With these celestial bodies in play, this eclipse energy could manifest in many ways, e.g., an uprising fueled by social media among the nation’s youth, a heavy-handed clampdown on the country’s media, or resorting to war to try to bring the world to a U.S. viewpoint. The week of July 22-26 could see highs in gold and crude oil, with lows in the S&P 500, 10-year T-notes and soybeans.
10–14 Taste of Chicago Chicago 13 Geeks on Parade* Chicago 15–20 The Governor’s Cup 2019 Corona Del Mar, CA 16 Full Moon & Lunar Eclipse
The “GovCup,” the oldest and most prestigious youth match sailing regatta in the world, was first held in 1967
16–17 In|Vest 2019 New York City
Susan Abbott Gidel, author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter. @susangsays
18–21 2019 Comic-Con International San Diego 21–23 TradersExpo* Chicago 23 Gann Day (1/3 of astrological year) Change in trend 26–28 Fortnite World Cup Finals New York City *For more information visit tastytrade (events)
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trades actionable trading ideas
LIGHT THIS CANDLE
Candlestick chart analysis for intermediate-term trading
TTWO: Take-Two Transactions By Doug Busch
T
ake a look at this daily chart of Take-Two Interactive Software Inc. (TTWO). It’s evident that price is about to break above the 200-day simple moving average. Price lost ground only five sessions in all of May and is showing great relative strength versus its peers, which have been down 22% from the most recent 52-week highs. Activision Blizzard (ATVI) and Electronic Arts (EA) are lower by 49% and 38% from their respective highs. Take-Two continues to make higher lows and higher highs against Entertainment Arts on a ratio chart going back more than two years. Enter this trade opportunity with a buy stop above the 50-day simple moving average at $111.25. Watch for a potential add-on cup base pivot if it hits $140.01. Douglas Busch, CMT, trades U.S. equities using technical analysis with an emphasis on Japanese candlesticks. @chartsmarter
Take-Two Interactive Software Inc. (TTWO)
TTWO ENTER WITH BUY STOP: $111.25
Source: ChartSmarter
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THE TECHNICIAN
A veteran trader tackles technicals
Three Gaming Stocks with “Personality” By Tim Knight
A
s strange as it may seem, charts, like people, have personalities. And chart personalities vary widely. Some brave charts seem immune to all but the most severe downturns. Others, such as pharmaceuticals, are at the mercy of news events—good or bad. And still others ebb and flow with the economy in general. One might assume charts tracing the stock prices of three companies that develop and sell video games might move up and down in virtual lockstep. They are Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software Inc. (TTWO). Although broad movements in equity markets have ample influence on the direction of all three of these securities, as the comparison chart illustrates in “Three video game companies,” right, they are most decidedly not moving in complete unison. Take a look at the charts one by one to tease out their own individual personalities. The purpose is to understand the past as well as to help anticipate the future. Let’s start with Activision (see “ATVI,” page 49). The chart shows the following: Broadly, the stock has spent the past two decades in a steady uptrend. The uptrend isn’t quite a channel, but the supporting trendline has been a reliable demarcation of support/resistance since the late 1990s;
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Three video game companies to compare Although broad movements in equity markets have ample influence on the direction of all three of these securities, they are most decidedly not moving in complete unison.
In the context of this uptrend, there were well-formed rounded tops in 2001 and 2008, which produced meaningful drops in price; A third top has completed relatively recently, and the stock has already suffered weakness; Perhaps most importantly, the price bars broke the uptrend in December 2018, and as if to affirm the new role of this line as resistance, price bars have been precisely bouncing off the underside of this now-broken trendline ever since.
Therefore, Activision is rich with past instances of predictive price behavior, and there’s a rather substantial long-term event in the form of the broken uptrend to use as the basis for future judgment Electronic Arts is a financial instrument with strikingly different behavior: It had a tremendous and wellformed top from 2005-2007, following by a plunge in price, suggesting much more typical behavior of the market as a whole;
Chart personalities vary widely
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Activision Blizzard
Electronic Arts
Activision is rich with past instances of predictive price behavior, and investors can use its rather substantial long-term broken uptrend as the basis for future judgment.
Electronic Arts, a “chart-friendly” stock, has been replete with meaningful price behavior.
Take-Two Minor reversals have plagued Take-Two (tinted on the chart) but they aren’t large or substantial enough to trade safely.
Activision is rich with past instances of predictive price behavior L ike EA, it enjoyed a steady uptrend from 2012 to 2017; And, also like EA, it has broken this uptrend.
After several years of seeking stabilization, Electronic Arts entered into a persistent and steady uptrend from 2012 to 2017; Over the past year, as the stock has been weakening, it has been forming a steady series of price “shelves” in the form of horizontal lines that represent lower levels of resistance; Just as it “obeyed” the supporting trendline for five years, prices in turn became compliant with the more recent descending trendline.
Electronic Arts is quite a “chartfriendly” stock (see “Electronic Arts,” above), as it also has been replete with meaningful price behavior, although in a different fashion from ATVI. Of these three, the least “featurerich” chart is of Take-Two (see “TTWO,” above), which has shown itself: Prone to minor reversals (tinted on the chart); although the reversals aren’t large or substantial enough to trade safely…
So, Take-Two and Electronic Arts have far more in common with one another than either of them share with Activision. The ocean of trading’s countless waves, currents and cross-currents prevents any computer or human from predicting with certainty what’s coming next. However, by understanding the previous price behavior and patterns of any particular stock (or commodity, crypto or anything else tradable), investors can achieve a familiarity that helps equip them to anticipate what is most probable in the coming weeks or months.
EA ATVI TTWO Tim Knight has been using technical analysis to trade the markets for 30 years. He founded Prophet Financial Systems and offers free access to his charting platform at slopecharts.com.
july 2019 | luckbox
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MACRO VIEW
Global directional trends
Unresolved Macro Themes Forecast Forward Volatility By Amelia Bourdeau
G
lobal macro trading benefits from volatility because moving markets create opportunities to trade. It’s also true that macro themes tend to simmer in the background and then come into play suddenly, spiking volatility and creating large, directional moves in assets. In one example, U.S. equity indexes remained relatively stable in early spring and then trended upward. The S&P 500 made a new high on April 30. Investors had grown somewhat complacent about U.S.-China trade tensions, thinking the two big nations would eventually resolve their differences. That passivity ended abruptly on May 5 when President Donald Trump tweeted threats to raise tariffs on goods from China. Suddenly, the U.S.-China trade war macro theme became front and center once again. U.S. equities opened lower on Monday, May 6 and continued to fall as trade war rhetoric and tariff announcements from both the U.S. and China escalated. Tracking broader event risk into the back half of this year, another unresolved macro theme lurks in the background—Brexit. In April, the European Union and United Kingdom averted a no-deal or “hard” exit by agreeing on a new Brexit deadline of Oct. 31. Cue the Halloween trading trick or treat jokes. (See “No longer fine,” right.) At the time of writing, Theresa May had just announced her resignation as the U.K.’s prime minister and parliamentary cross-party Brexit negotiations were in a stalemate. While no one knows the outcome in advance, investors do know that important and unresolved political events that influence economies tend to create market volatility. After the April 10 announcement that the U.K. would delay Brexit until Oct. 31,
50
No longer fine Everything was fine in U.S. equities until the tariff tweet-storm.
Source: Bloomberg LLP
the British pound/U.S. dollar (GBP/USD) currency pair implied volatility plummeted as traders became unsure of near-term drivers for the currency. Should Brexit themes heat up, GBP/USD volatility could spike from low levels, causing moves in that currency pair (See “Could it spike again?” page 52). Taking a look at narrow or shorter-term event risk, the macro theme that will likely keep repeating for the rest of 2019 is volatility around Federal Reserve press conferences. These shorter-term event risks provide opportunities for more tactical trading. Federal Reserve Chairman Jerome Powell doesn’t seem to have found his footing yet on
the market communication front. In addition, this is the first year that the Fed has moved to hold press conferences after every policy decision, leaving room for more instances of communication error. Lastly, there’s a debate on whether the U.S. economy is in the midst of some late cycle growth resiliency or is starting a bit of a growth resurgence. All of these unknows should keep investors engaged and lead to flairs in volatility. Markets don’t like uncertainty and so safe haven assets tend to benefit in those times. The safe haven currency JPY has been strengthen- (Continued on p. 52)
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FUTURES
A savvy futures trader’s take on the markets
Metals Detector By Pete Mulmat
H
ow about this for a new idea: The Beach Exchange. It’s based on the treasure hunters who scan the shoreline with metal detectors in search of hidden objects of value. It’s not just a hobby because some beachcombers make a living by selling the rings, watches, coins and other metallic valuables lost by sunbathers and swimmers. But investors don’t need to break out coolers, beach umbrellas and folding chairs for a pilgrimage to the sea. Instead, they can sit back in front of a computer screen and wield a metaphorical metal detector to find a “nugget” or two to trade this month. Precious metals prices have been declining during recent weeks. Gold fell below the $1,300 per ounce level, while silver is trading under $15 per ounce. Platinum has underperformed all precious metals for years. Even the price of palladium, which was the leader of the pack since 2016, has lost ground falling from just under $1,600 per ounce in March to under $1,300 over recent weeks. Silver and other metals have had a rough go: see “Poor silver,” right. When investors stack metals against metals, the high positive correlation shows a more viable trade, as shown in “The other metals & correlation to gold,” right.
/ES
Poor silver Silver and other metals have had a rough go recently.
Silver is historically inexpensive compared with gold
The other metals & correlation to gold When investors stack metals against metals, the high positive correlation shows a more viable trade, CORRELATION TO GOLD SINCE 2018
SILVER (/SI)
+0.84
PLATINUM (/PL)
+0.73
COPPER (/HG)
+0.75
Trade in focus: Gold to silver ratio is near highs Historically, gold and silver have been both a means of exchange and a store of value. Both metals have been currencies for thousands of years, and at times each served as a support for paper legal tender under gold
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and silver standards. However, gold has done a better job retaining value in the current environment. For the past 45 years, the average level for the relationship between silver and gold has been at the 55:1 level. (See “A level relationship,” right.) The chart dating back to 2010 shows the ratio has traded in a range from 31:1 to 87.2:1 with an average of 54.3:1 over the past eight years. At 87.10:1 on May 12, the price relationship is close to the high end of the range, meaning that silver is historically inexpensive compared to gold. A “pairs” trade on gold and silver would take advantage of the price extreme in gold relative to silver. Selling gold and buying silver would be one way to take advantage of this.
/GC
Pete Mulmat, chief futures strategist at tastytrade, serves as host for a number of daily futures segments on the tastytrade network under the main flagship programming slot called Splash Into Futures.
A level relationship For the past 45 years, the relationship between silver and gold has been, on average, at the 55:1 level.
A “pairs” trade on gold and silver would take advantage of the price extreme in gold relative to silver
MACRO VIEW
(Continued from p. 50) ing against USD during spikes in volatility and should continue to do so. With all of the unknowns ahead, buy a 104.00, three-month U.S. dollar/Japanese yen (USD/JPY) put.
Could it spike again? Should Brexit themes heat up, GBP/USD volatility could spike from low levels, causing moves in that currency pair.
Amelia Bourdeau is CEO at marketcompassllc.com, an advisory firm that provides global macro education and trading strategy to investors at every level. @ameliabourdeau
Ring in the risk Alternatively, a trade can be done in the /6J futures. Because it is Japanese centric—the Japanese yen/U.S. dollar currency pair (JPY/USD)—a bullish Japanese currency would be obtained by buying the first call strike below the market and selling the first sell strike above the market. This has a higher probability of success than simply buying the USD/JPY, while also being a defined risk trade.
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r T
T Source: Bloomberg LLP
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Small. Standard. Simple.
Big ideas about futures Self-directed investors need more appropriate ways to manage their risk, hedge their positions, and speculate on market movements. That’s how we’ll bring more participants to the market.
For a limited time, you can subscribe to the Small Exchange to lock in reduced exchange and market data fees when you trade the Smalls. No annual or renewal fees, no obligations. For life.
This is a new kind of exchange where you enjoy the best of futures without the institutional baggage that keeps you in the past.
For more info on the Smalls, visit smallexchange.com.
The Small Exchange’s application was submitted to the CFTC in December 2018. The CFTC generally reviews the application for 180 days; however, there are no guarantees that the Small Exchange will be approved by the CFTC within this timeframe or at all. The launch of the exchange is contingent upon approval. Please visit the website for full terms and conditions.
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DO DILIGENCE
Emerging financial technology helps proactive investors understand their portfolios
Stocking up on Gaming Stocks By James Blakeway
O
K, put down the game controller and back away slowly. Now, move to the trading platform and load some of the symbols in this article. It’s time to put those speedy clicking fingers and twitching eyeballs to work. Gaming’s fun. But so is trading. And both are potentially profitable. Since 2000, the video game industry has continued to benefit from lower technology costs coupled with improved graphical fidelity and processing power. The last two decades saw Microsoft (MSFT), Sony (SNE) and Nintendo (NTDOY) duke it out to sell home video game consoles and earn a place in the family room entertainment center. Combined, those companies have sold more than 900 million home and hand-held consoles in the last 20 years. They sold the vast majority in North America, Europe and Japan. Investing in either Microsoft or Sony constitutes a partial investment in their video game branches. Both are multi-national corporations with other, more prominent, divisions. Nintendo’s sole focus is the video game industry, having been a leading hardware manufacturer and software developer for the last 30+ years. Despite creating and owning the iconic Mario franchise, Nintendo has seen a mix of success and failure with their hardware over the decades. With each iteration of hardware, Nintendo, Microsoft and Sony back themselves into a corner and hinge their success on consumer purchases and reception of that console. If more customers purchase the consoles,
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Steady growth, lagging stocks These companies reported steady or growing earnings last year. However, their stock prices have failed, with the exception of Advanced Micro Devices (AMD), to recover from 2018 declines. Symbol
Market Cap (5/8/19)
1 YR Return (5/8/19)
QF Liquidity Score (1—100)
Listed Options?
AMD
$28.3B
126.7%
100
Yes
ATVI
$35.0B
-33.8%
100
Yes
EA
$28.0B
-28.3%
100
Yes
NVDA
$101.4B
-31.8%
100
Yes
TTWO
$10.6B
-12.2%
50
Yes
S&P 500 Index (Benchmark)
N/A
N/A
N/A
third-party publishers will develop more games. The publishers release games for Microsoft, Nintendo and Sony hardware but also offer games for PCs and Smartphones. The ability to remain hardware-agnostic enables the publishers to stay nimble and pivot with changing consumer trends. Three of the world’s largest video game publishers are publicly traded U.S. corporations: Electronic Arts (EA), Activision Blizzard (ATVI) and Take-Two Interactive Software (TTWO). Those companies are responsible for some of the most popular and lucrative games and game series. Electronic Arts is known for the yearly iterations of the Madden NFL and FIFA soccer video game franchises, which, combined, sold more than 14 million copies last year. Activision Blizzard is perhaps best known for the annual Call of Duty games that have ranked in
6.7%
the Top 5 selling games for the past nine years. Take-Two Interactive is known for its subsidiary Rockstar Games, creator of the Grand Theft Auto game series. Grand Theft Auto 5 has grossed more than $6 billion since its release in 2012, making it one of the highest-grossing media properties of all time. All three companies reported steady or growing earnings last year, but their stock prices lagged behind the S&P 500 and did not fully recover from the late 2018 U.S. stock market decline. Activision Blizzard’s price drop was partially fueled by controversial layoffs and a corporate restructuring despite posting record earnings. Even with the lagging recovery, these companies represent $73.6 billion in market cap (See “Steady growth, lagging stocks,” above.) Another sub-sector of the video game industry is populated by the
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companies behind state-of-the-art graphics and processing power. Standouts in that space include NVIDIA (NVDA) and Advanced Micro Devices (AMD). AMD’s processers are used in both the Microsoft XBOX One and Sony PlayStation 4, while NVIDIA tech is used in the fast-selling Nintendo Switch. As with the third-party software developers already mentioned, NVIDIA and AMD are not just tied up with Microsoft, Sony or Nintendo. Products from both companies have seen mass adoption in both the PC and mobile markets. This tech helps boost processing power in phones, which allows for more impressive games on smaller screens. Computers continue to become more powerful thanks to this same tech, which pushes the capabilities of business and research to new levels. Both mobile and PC gaming have become more prominent in large developing markets like China. While investing in AMD and NVDIA adds exposure to the video game technology, it’s really a stake in the growth of computer processing power. Running an equally weighted portfolio of the three game developers and two processor manufactures through Quiet Foundation’s (QF) free analysis system yields
some interesting metrics on these stocks. The portfolio scored 60 (out of 100), achieving the second-highest overall rating, “On Track.” One area of weakness for this hypothetical portfolio was the historical metric of “Portfolio-to-Benchmark Evaluation.” The portfolio received the lowest possible score for this metric because of its lower three-month return, compared with the S&P 500 benchmark (3.4% versus 5.4%), while demonstrating higher risk and volatility. The analysis also concluded weak diversification among these stocks, likely because of their single sector concentration. These stocks scored highly in the liquidity metric, with all sharing a perfect liquidity score with the exception of TTWO. The portfolio also scored highly in the opportunity metric because all five stocks have options markets. Are there any video game funds to give investors exposure to the sector? In short, no. The ETF industry offers a plethora of funds focused on tech but very few related to the video game industry. The only one that stands out is GAMR, offered by ETF Managers. This fund holds a portfolio of 79 different stocks related to the video game industry. The fund has a position in all the companies
60: On Track
There’s no plausible exchange-traded fund for investors seeking exposure to the video game industry mentioned above as well as other tech companies that have ties to video gaming, such as Intel (INTC) and Alphabet/Google (GOOG). GAMR also holds a diverse mix of software developers from Europe and Asia that are harder to trade in the United States. The drawbacks of this ETF are higher costs and lower liquidity. GAMR has a 0.75% expense ratio, which is steep in the age of low cost ETFs. Additionally, the average daily share volume for the past year in GAMR was less than 23,000 (a 31% QF liquidity score). For comparison, XLK (the SPDR Technology Sector ETF) has seen an average daily share volume of 14.8 million, with an expense ratio of 0.13%. A lot of this comes down to economies of scale, making GAMR appear an expensive and fairly illiquid investment. While there’s no plausible ETF for investors seeking exposure to the video game industry, some stocks could merit inclusion for a diversified stock portfolio. The third-party software and tech manufacturers may be more appealing given their ability to pivot faster than the console makers. As always, investors should remember to perform their due diligence and never put all their eggs in one basket. James Blakeway is CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment advisory service for self-directed investors.
Evaluate any portfolio with Quiet Foundation
Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
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CHERRY PICKS
Ripe and juicy trade ideas
Reassessing Options in a Down Market By Michael Rechenthin
I
n drawdowns as when the Nasdaq, Dow Jones and S&P 500 recently found their way down 10%, 7% and 6%, respectively, from their prior peaks of a few months before, investors may want to focus on two questions: what are current positions doing, and, where does opportunity exist? Generally, problem positions fall into one of the categories in “What are current positions doing?” (page 57). When assessing compromised options positions, consider how deep the short option is in-the-money (ITM). Is it $1 or $25 ITM? The deeper ITM the option is, the less time decay will be built into the option. The position will generally have a higher probability of being assigned—which is not a huge deal—but being assigned stock does negate the reason why options are so powerful. Options have time decay—and if one has been assigned stock, time decay is no longer working in one’s favor. So as a general rule, keep those short options rolled. Where does opportunity exist? When looking for additional opportunity, focus on market sectors that have been “beat up” with high levels of volatility. Not only can an investor buy things for less than they were selling for previously, but the higher volatility means options are selling at a premium. That can provide a theoretical edge. In “Bright side,” right, you can see that sector exchange-traded funds (ETFs) have been hit especially hard. VanEck Vectors Oil Services ETF (OIH) is down 54% from its highs and SPDR S&P Oil & Gas Exploration & Production (XOP) is down 42%. Two reasons for this downturn: Oil is down 28% from last year’s peak, and the overall market is down, which often causes investors to punish, especially hard, the underperforming sectors.
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Bright side Oil stocks tend to be cyclical—boom and bust and back to boom again—in a few years.
OIH
When looking for opportunity, focus on market sectors that have been “beat up” with high levels of volatility To sign up for free cherry picks and daily market insights, visit tastytrade.com
6/7/19 12:09 PM
trades
The bright side is oil stocks tend to be cyclical—boom and bust—rinse and repeat—back to boom again in a few years. With option implied volatility so high in this sector (meaning traders have “bid up” the insurance for these stocks) a trader looking to take a bullish stance can get paid to enter a long position when stocks are at huge discounts in price. Consider selling an out-of-the-money (OTM) put in OIH. If the stock is at 14, the first OTM put would be 13. Because the stock would have to fall further than 13 minus the credit received from the put, this is a relatively high probability trade. Another interesting trade is the Metals and Mining ETF (XME). This ETF can be had for 36% of a discount from peaks made last year. Consider buying 100 shares and then selling an ATM call against the stock. The call has the potential to lower the breakeven by several percentage points. Not a bad way to start a bullish stance!
XOP
What are current positions doing? Generally problem positions fall into one of the following categories. Problem
What to do
Stock that was purchased at higher levels
Consider selling a call against every 100 shares held. That can help to reduce the overall breakeven. For example, selling one out-of-themoney call against 100 shares can bring in $100 or more to offset losses.
Short puts that were sold OTM and now are deep ITM
Consider “rolling” the option to a month that’s farther out to get more time decay (extrinsic value).
Short strangle where one side is now ITM
If the stock has dropped, the short put might be tested. If that’s the case, roll the call down to achieve more extrinsic value. If the stock has increased in price, the short call might be tested. If that’s the case, roll the put up to achieve more extrinsic value. Also consider rolling the entire position out in time to get more extrinsic value and get more time in one’s favor.
Volatility has expanded
If the strike(s) aren’t tested and there’s sufficient time before expiration, consider waiting to see if volatility decreases. Otherwise, follow the same mechanics as though one side of the short strangle was tested.
Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade.
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tactics essential trading strategies
BASIC
Theta: Money for Nothing Ready to make a profit just by letting time pass? With “theta,” it’s a distinct possibility By Anton Kulikov
I
magine making money just by letting time go by. Savings accounts accomplish that but they’re about as exciting and profitable as watching paint dry. Luckily, there’s another way, and it’s called “theta.” Traditionally, the only way to try to make money with stock is to buy it and wait until the price goes up. But what if there were a way to make money even if the stock doesn’t budge? In the world of options, that’s possible because of the powerful concept of theta. Theta is a number that represents a phenomenon that occurs with all option contracts: time decay. Options’ values get whittled down over time, all the time. And by selling options, investors take advantage of that time decay.
Time decay benefits option sellers and is a cost to option buyers. Why? Think about options as insurance contracts. When an insurance company sells an insurance contract, the company collects monthly premiums from the insurance buyer. In e x c h a n g e , (Continued on p. 61)
Price over time Time decay benefits option sellers and is a cost to option buyers.
Every time a trader sells an option, a positive theta value is associated with his position. That means that every day that passes, all else remaining equal, the price of the option decays by the theta value, and the seller has generated a profit on the position.
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INTERMEDIATE
Pairs Trading Buying one index and selling another carries less risk than just buying or selling one index position outright By Michael Gough
T
urn on CNBC, Bloomberg, tastytrade or any other financial media outlet and a host or commentator will soon mention “the market.” Depending on the outlet, those well-coiffed personalities could be referring to any of the four major equity indices. In the U.S. they would be the S&P 500, Dow Jones Industrial Average, Russell 2000 or Nasdaq 100. Each of those indices represents a different portion of the equities market, but they all tend to move together. As of this writing, any pair of these indices has a six-month price correlation greater than 0.80, meaning they move in similar directions. These indices move closely because many of them hold the same stocks! Roughly 80% of the stocks in the Nasdaq are also in the S&P 500. Additionally, 100% of the stocks in the Dow are held in the S&P 500. The overlap results in the indices moving in similar ways, hence the strong price correlations. Take a look at “Trading by the pair” (right), which depicts the percentage change of ETFs (exchange-traded funds) representing the S&P 500 and the Dow since 2018. Note that most of the time the two products trade very closely. However, differences in performance between them occasionally increase. Pairs trading is a professional strategy that capitalizes on extreme divergences between highly correlated products. Unlike trading the price or vola-
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tility of a single underlying, a pairs trade exploits the relationship between two underlyings by selling the leading stock and buying the lagging stock. Pairs trading carries less risk than just buying or selling one underlying outright because losses in one position are often offset by gains in the other position in the correlated pair. Structuring a pairs trade The first step in structuring a pairs trade is finding two highly correlated assets. Some examples include gold and silver, the British pound and the euro, and the S&P 500 and the Dow. SPY and DIA are great candidates for a pairs trade because their six-month price correlation is 0.93, a strong positive correlation. A strong
The best entry points generally occur when assets have an extreme divergence in performance
Trading by the pair Most of the time these two products trades closely. However, differences in performance occasionally increase, and that’s when pairs trading can prove useful.
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correlation means two assets move similarly and thus reversions (to the mean) in performance are likely. The next step is to determine an entry point. The best entry points generally occur when the assets have an extreme divergence in performance. Over the last two years, SPY and DIA had an average performance difference of 0.8%. Today, their performance difference has widened to 2.47% as SPY has outperformed DIA. This presents an opportunity to sell SPY and buy DIA. After finding a potential trade, it’s critical to calculate how many
Pairs trades are placed as a single order to avoid “leg risk,” which happens when half of a pairs trade is on
shares of each product to buy or sell. This is computed by comparing the notional amounts for each asset. For an ETF, the notional amount is simply its price. Currently, SPY is priced at $285 and DIA is priced at $256 thus the notional adjusted ratio is 1 to 1. Assume, for example, a pairs trade with ABC and XYZ. If ABC was $50 and XYZ was $100, traders would need two shares of ABC for every one share of XYZ. After determining the notional ratio it’s time to trade. Execution is easy. Because SPY outperforms DIA, sell SPY and buy DIA in a ratio of 1 to 1. This trade profits from mean reversion between these two highly correlated ETFs. With a basic understanding of options, this trade can expand to include a theta (time decay) component. Because one share is equivalent to one delta, traders could sell 50 shares of SPY and sell one at-the-
Delta measures the degree to which an option is exposed to shifts in the price of the underlying asset
money put in DIA or sell 30 shares of SPY and sell one 30 delta put in DIA, or any other delta combination, so the ratio is 1 to 1. Pairs trades are placed as a single order to avoid “leg risk,” which happens when investors have one half of a pairs trade on, and that stock or ETF is going against the investor without the other half of the pair to offset the loss. The same is true when exiting a pairs trade, and they also should be closed as a single order. That removes the outright directional exposure of just buying DIA or selling SPY and adds portfolio diversification. Pairs trading can present challenges and isn’t a beginner’s strategy. But it adds flexibility and trading choices to a portfolio, and it’s worth learning about. Michael Gough, a self-taught coder who became an options trader, serves as co-host of tastytrade’s Research Specials Live.
BASIC
(Continued from p. 58) the company takes on the risk for the value of whatever’s insured. The same is true with options, both short calls and short puts. The put option seller, for example, is taking on the risk that the stock will decrease in value. In exchange for taking on that risk, the seller is entitled to a daily premium, aka positive theta. So, what affects the value of theta? In other words, what determines the amount that the option seller will collect each day the stock doesn’t move? Three main factors come into play: the price of the underlying stock, the time until the option expires and the stock’s level of implied volatility (uncertainty). The price of the stock affects the theta value because the more expensive the stock is, the larger the prices of options and thus the larger the amount of theta. Think of it as selling insurance for a mansion
as opposed to a shack. Both have risk, but the mansion (high-priced stock) has more risk than the shack (low-priced stock). Next, the time until expiration is inversely related to the value of an option’s time decay (theta). Generally, as an option approaches expiration, the theta value increases. When an option is far from expiration, the theta value is small. Finally, the level of implied volatility (uncertainty) and theta are directly related. When implied volatility goes up, so does the option’s daily premium decay. Think of this as buying hurricane insurance for a condo in Florida versus a condo in the landlocked Midwest. Obviously, hurricane insurance is a lot cheaper in the Midwest because there’s very little risk of a hurricane in Iowa. In Florida, on the other hand, there’s a lot of risk of a hurricane and, therefore, the insurance premiums will be more expensive.
It may be becoming clear why it’s possible to make money on a stock that doesn’t budge. By selling premium and collecting theta, the stock does not have to move. This is similar to the way insurance companies make money in the long term. Most of the time, hurricanes aren’t hitting the condo, but the company continues to collect the premium. On occasion, a hurricane does hit, and the insurance company has to pay—but most of the time that doen’t happen. So, each individual investor must decide whether to buy or collect the premium. Neither is necessarily a “better” strategy, but one has better probabilities by collecting theta. Selling premium can be daunting at first, but in the long run, with a consistent strategy and the patience to let the probabilities work themselves out, theta will become a new friend. Anton Kulikov is a trader, data scientist and research analyst at tastytrade.
The value of an option withers as the days go by, and savvy investors can take advantage of that time decay july 2019 | luckbox
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ADVANCED
No-Choke Collars Instead of purchasing puts to protect a portfolio, consider the zero-cost collar By Michael Rechenthin
S
ome think of investing as a noble calling. It provides an opportunity to realize a profit, reduce the cost of capital, help create jobs and participate in the success of American industry. No wonder investors feel good when the markets are strong. But they worry when markets decline so they need a hedge. They can choose smart hedges or not-so-smart hedges, so let’s look at examples of both. Investors sometimes buy puts below the current stock price in an attempt to buffer against possible declines in the stock price. They call the strategy a “protective put.” But often, the price doesn’t decline at all or declines less than the value of the protection the investor purchased. The investor is then out money for the cost of the put. That’s a bad investment strategy—overpaying for insurance. But investors have two good alternatives to the protective put: the zero-cost collar and the out-of-
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Worth the Cost This table shows the cost of protection at varying levels, based on a $100 stock price and purchasing a put with 30 days until expiration. 10% Implied Volatility
20% Implied Volatility
30% Implied Volatility
100 strike
$110
$224
$338
95 strike
$4
$55
$140
90 strike
$0.01
$7
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the-money put. “Worth the cost,” above, shows how much it costs to purchase protective puts at varying levels. The implied volatilities are also listed—the higher the implied volatility, the higher the expected movement of the stock price and higher the cost of the put. The traditional long put hedge doesn’t work as an overall trading strategy. First, investors who buy
puts often overpay. The strategy becomes popular when a market has declined or investors expect an event to occur. Both push option “insurance” to its highest point. It’s common to see volatility of 20% or 30%+. So instead of purchasing insurance for $4, the investor is paying $55 or $140+. But many times over the past decade, observers have seen that the market’s “bite is rarely as bad as the bark.” The market hasn’t declined as much as expected and didn’t stay down as long as feared. Protective puts can expire worthless. Second, investors often purchase the far out-of-the-money puts because they’re less expensive than closer out-of-the-money puts. The farther away the put’s strike price is from the stock price, the cheaper the put. But that also means that a less expensive put has less protective value. The stock has to decline to fairly close to the put’s strike price before that put really starts to provide a hedge. The closer the put’s strike price is to the stock price,
Investors have two good alternatives to the protective put: the zerocost collar and short out-of-themoney put
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Zero-cost collar Highest possible call to sell to purchase protection at no additional money— the “zero-cost collar”—based on a 100 stock price and 30 days until expiration.
Risk 1-2-3
At any implied volatility
The short put is theoretically safer than buying stock and, depending upon how far out of the money the short put is, it can escape loss if the stock declines just a little.
Protection if stock drops below current price of 100
A 100 call would have to be sold, to finance the long 100 put
The protective put creates a loss.
Protection if stock drops below 95
A 105 call would have to be sold, to finance the long 95 put
Protection if stock drops below 90
A 110 call would have to be sold, to finance the long 90 put
the more protection it provides. The farther away the put’s strike price is to the stock, the less protection it provides. That’s why the farther out of the money the put is, the cheaper it is. So, if the stock does decline, but not so much that it reaches that far out-of-the-money put’s strike price, the investor might make a few bucks on the put but lose more money on the stock. A better alternative With what’s called a zero-cost collar, an investor buys a put and then “finances” it with a short out-ofthe-money call above the market. Think of it as a covered call that’s “paying for” the long-put protection. This is a preferred method of adding protection because it’s exchanging the costs of the long put, with the reduction in upside potential. After all, by selling the call short, the investor is limiting the upside, but that’s the trade-off the investor has to make to reduce the cost of the protective put hedge. (See “Zero-cost collar,” above.) The zero-cost collar provides a way to purchase protection when worried about a decline. The call enables an investor to buy protection with little to no outlay of cash. It tends to provide better results over time because the investor is not locking in the cost of the put if it’s not used. The downside is that while the outlay of capital is tech-
nically “zero,” the true cost is the upside potential the investor loses in exchange for having zero cost. But the risk of losing out to the upside may not be a consideration for investors concerned about losing money to the downside. An even better alternative A better alternative to the protective put—and even to the zero-cost collar—is to sell an out-of-themoney put. Instead of purchasing protection, the investor ditches the shares of stock and sells the out-ofthe-money put. It’s theoretically safer than buying stock and, depending upon how far out of the money the short put is, it can escape loss if the stock declines just a little. Additionally, the short put can require considerably less money than owning the stock with the collar. The three risk graphics in “Risk 1-2-3,” right, compare the three strategies. Every investment balances tradeoffs of potential profit and risk. Choose how much risk to take for a given profit. Don’t limit risk in ways that make it much harder for the investment to profit. That’s what the protective put does, and that’s why investors should consider collars as a hedge and short puts as an alternative to buying stock.
The zero-cost collar is accomplished at minimal cost in exchange for limiting upside potential.
The short put allows an investor downside.
Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade.
july 2019 | luckbox
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luckbox of the month
ZILLOW: FLIPPIN’ LUCKY DESPITE PROPHETIC LOSSES
Z
illow Group Inc. (ZG), which has generated an unbroken series of annual losses since its initial public offering in 2011, has figured out how to lose even more money—a lot more money— and at the same time boost revenue and make its shares jump: house flipping. In its most recent quarterly earnings report, Zillow disclosed the dollars and cents of its newest enterprise, “Zillow Offers,” which buys and sells homes. The company describes this as “a new, hassle-free way to buy and sell homes directly through Zillow.” The report splits out the business segments, including the “Homes” segment, which is its house-flipping operation. So let’s see how Zillow’s new business did in the quarter ended March 31: Sold 414 homes. S ales proceeds added $128.5 million to revenues, for an average selling price of $310,400 per home. The purchase cost of these homes added $122.4 million to cost of sales, for an average purchase price of $295,700 per home. T his amounts to an average gross profit (selling price minus purchase cost) of a meager $14,700, or 4.9% per flip. But it costs money to buy homes, get them ready to flip, market them, finance them until they’re sold, and deal with the transactions in a corporate manner. So Zillow booked the following expenses associated with its home-flipping operations: $20.8 million in sales and market-
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ing expenses. $12.3 million in technology and development expenses. $18.2 million in additional administrative expenses. So, revenues of $128.5 million from selling the homes, minus $173.7 million in costs and expenses associated with these home sales, yields a loss on its home-flipping operations of $45.2 million. This loss of $45.2 million on 414 home flips means: Zillow lost $109,190 per flip on average. Zillow lost 37% on each flip on average. So this is a horrendous business. But it performed miracles because the sales of those houses—a business activity Zillow didn’t engage in a year ago—added $128.5 million to revenues. This constituted three-quarters of the total revenue increase of $154 million (or 51%) to $454 million in total revenues in the quarter. And because of the loss at its home-flipping business, Zillow’s total loss soared by 263%. In other words, a 51% increase in revenues caused its quarterly loss to soar by 263% to $67.5 million. This loss amounts to a stunning 15% of revenues. Zillow isn’t a startup. It has more than 4,000 employees. It has been a publicly traded company for eight years. And it has been on an acquisition binge, buying all kinds of other companies. And now it has figured out a way to lose a lot more money. But Zillow is apparently not yet losing enough money, and so it is going to expand this ruin-
ZG
ous home-flipping operation from eight metropolitan areas at the end of March to more markets to boost its revenues and its losses. Home flipping offers very few economies of scale; so look forward to a cascade of losses. Because revenues increased— no matter that this caused Zillow’s losses to more than triple—shares soared 19% on “better than expected” revenues and the prospect that Zillow will expand its ruinous homeflipping operation to many more markets and boost its losses further. When a stock market rewards companies that have always lost money, such as Zillow, for coming up with a way of losing even more money, it takes the incentive away for management to build a profitable business model. And it shows to what extent this market and the entire hype machine around it are twisted. But it rewards the shortsighted stockholders who happen to be long Zillow stock. Yes, the markets often reward luckboxes. And that makes the owners of the company’s 146,495,306 shares deserving of the title luckbox of the month for July 2019. —Wolf Richter
Markets have rewarded Zillow for coming up with a way of losing even more money
In Q1, the State of Wisconsin Investment Board, the investment manager for the $104 billion Wisconsin Retirement System, doubled its holdings in Zillow to 1.82 million shares.
luckbox | july 2019
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