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Will the Guild Esports IPO hit the right buttons?

Guild Esports is set to become the first esports franchise to list in London, but will it be a worthwhile investment or is there a better way of gaining exposure to the growing market?

  • Guild Esports is aiming to become the first UK-listed esports franchise through an initial public offering (IPO), following Danish outfit Astralis Group which listed late last year, as it tries to capitalise on the booming esports market.
  • The handful of existing esports stocks, like Gfinity and Astralis, have seen their share prices struggle since listing.
  • Guild Esports has warned it will need significant sums to build a leading esports franchise from scratch, and IPO investors could face significant dilution in the future.
  • Investors can consider gaining exposure to esports through more established companies, like those that make video games, or through exchange-traded funds (ETFs) to spread the risk.

Guild Esports IPO: what you need to know

Guild Esports has wasted no time in launching an IPO. Despite only being established late last year and relaunched in June, the company has said it intends to join the London Stock Exchange sometime this autumn.

Read more: What is an IPO and how does it work?

This will make it the first esports franchise to list in London, but not the first esports stock. That title belongs to Gfinity, which runs esports tournaments from the UK’s first dedicated esports arena and listed way back in 2014. Plus, Guild Esports was also pipped to the post globally because Danish esports franchise Astralis Group listed late last year.

Guild Esports told Reuters that it intends to raise £20 million by floating around 40% of its shares, targeting a valuation of around £50 million. The company has only said it intends to list, meaning an IPO is not guaranteed, and we are still waiting for the final details of how many shares will be issued and at what price.

What is Guild Esports?

Right now, Guild Esports is nothing more than a newly created business that has an impressive board and backers as well as a small group of youngsters that are handy with a games controller.

But the esports market is booming and the company, along with the rest of the industry, regards these players as ‘athletes’ that can stir up the same level of excitement – and attract the same vast sums of cash - as world-class sportsman. The company has already said it thinks esports can rival ‘many of the traditional major sports in a matter of five years’.

The company intends to create a franchise built on the same model used by football and basketball teams. It will use the funds it raises from the IPO to build a skilled team of up to 20 players competing in four online games: shooters Fortnite and CS:Go, car-football’s Rocket League, and the well-established football game FIFA. It intends to hire scouts to search for the best upcoming talent and use more experienced players to train younger ones.

Winning tournaments will be crucial to its success, just as it is for any traditional sports team. A report from DMarket, an online platform that allows people to trade in-game items like skins and weapons, said the highest paying esports tournament had a total prize pool of just under $35 million, with the winning team taking home $15.6 million.

But creating a franchise will also involve creating brands for their players and injecting some personality that can attract the real value for any sports team – sponsorship deals, merchandise and a huge amount of social media followers. More than three quarters of all revenue in the global esports market this year will come from media rights and sponsorship, with tournament winnings making up just a fraction of the total, according to Newzoo.

Guild Esports says ‘the core asset of any sports team is its talent pool’. Currently, it has trio that play Rocket League and recently recruited a 21 year old German that plays FIFA. It intends to make the inaugural launch of the Guild Esports team this autumn too, once it has had the chance to recruit players using investor’s funds from the IPO.

One reason Guild Esports has attracted attention is because of its board and shareholders. The company has not wasted the fact that former England footballer David Beckham is a shareholder through his vehicle DB Ventures, claiming he will ‘use his global influence and following to support the development of the company’s brand and business’.

Plus, the board is being led by Carleton Curtis, the former vice president of programming at gaming giant Activision Blizzard and head of Red Bull’s esports division.

Why is Guild Esports launching an IPO?

There are two reasons why a company launches an IPO. The first is to raise the money it needs to grow, which in this case means recruiting the esports players it needs to compete. The second is to give early investors a chance to sell part of their stake and get a firm valuation for the business.

It has been a lacklustre year for IPOs thanks to the disruption caused by the coronavirus pandemic and the uncertainty it injects into the stock market, but Guild Esports is also trying to capitalise on the growing esports market and audience. It has already said it expects the IPO to give fans an opportunity to invest and allow it to become ‘one of the world’s top ten esports franchises within three years’.

The pandemic, to a degree, has helped. With the majority of sports having been off the calendar during lockdown, more people have turned to esports this year as a way of getting their fix. According to the company, the number of people watching esports will grow to over 440 million this year from just 130 million in 2014, with frequent viewers increasing to nearly 200 million from just 58 million. There is expected to be an audience of almost 650 million by 2023.

This growth will propel the global market value to around $1.1 billion this year, according to Newzoo, up from $950 million in 2019. That is forecast to rise to $1.55 billion by 2023.

How will the Guild Esports share price perform after the IPO?

It is hard to judge how Guild Esports will perform once it goes public, but there are reasons to be cautious. First, there isn’t much of a business to invest in yet, so IPO investors will be relying on the company creating some value using the proceeds.

There is no track record to go off apart from the experience of the board and the performance of the small group of players it already has. The talent that will prove to be the company’s ‘core asset’ is not in place yet, but it seems the company already has its targets lined up considering it plans to unveil its maiden team before the end of autumn. Still, without a team we have no insight into whether Guild Esports can attract any real value in the near future through the likes of sponsorships.

There is likely to be no revenue coming through the door straight away. This means the investment opportunity lies purely in its potential. The fact it was reported to have originally targeted a valuation of £100 million – double the £50 million it is now chasing – also suggests it might struggle to rally the appetite from investors that it had first hoped for.

Plus, those considering investing should be wary of dilution. The company believes the esports market, while still nascent, will eventually be consolidated between ‘an exclusive group of professional teams,’ hence why it wants to move early and grab the attention of the markets. But it has also conceded that building academies, scouting networks and the rest of the infrastructure it needs is ‘going to take a lot of capital’ – especially if it plans to do it all within a few years. This suggests that the IPO will not be the last time it taps investors for money unless the tiny company intends to load up on debt.

Gfinity shareholders have been slowly diluted

Investors may be able to take some lessons away from how Gfinity has performed. Gfinity was the first esports stock to list in London back in 2014. The company owns a number of online esports community websites, partners with big names such as BT Group to help with esports coverage, and it owns the first dedicated esports arena in the UK. Although it is a very different business to Guild Esports, it is the closest thing to a peer.

Gfinity has had to raise considerable sums from investors since listing, causing significant dilution. It started out life as a public company with just under 78 million shares in issue that listed at an IPO price of 17p, but today it has over 763 million shares that trade at just 3.6p.

Having raised £3.5 million through its IPO, Gfinity has tapped investors through eight more funding rounds to raise over £38 million in total, priced as high as 27p and as low as just 1p – with the latter being the price of the most recent fundraising. Plus, it has granted significant number of share awards and used stock to pay for acquisitions, all of which has added to the dilution. Gfinity shares have not traded above their IPO price since March 2018.

Astralis Group shares fail to find ground after IPO

The only publicly listed peer that can be used to compare Guild Esports is Danish franchise Astralis Group, which is one of the leading franchises in Europe and a ‘major global player’. It owns what it calls the ‘most successful Counter-Strike (CS:GO) team of all time’ and it also competes with a FIFA team named Future FC, meaning it is likely to directly compete with Guild Esports.

It also competes in arguably the most popular esports game in the world – League of Legends – which has attracted larger crowds than that of major sporting competitions like Wimbledon.

The company listed on the Nasdaq First North Growth Index in early December last year, raising DKK150 million by selling 16.8 million new shares at DKK8.95 each. But investors have been left disheartened by the fact its share price has fallen by half since listing, with the stock trading at just DKK4.73 today.

This may imply that appetite for the stock wasn’t as great as anticipated, or that it overpriced its IPO. Either way, it is another barometer that suggests Guild Esports shares may struggle post-IPO, depending on how it is priced.

Astralis Group, as you would expect, is loss-making. We will have very little financial information to go off for Guild Esports even once it has listed because it is such a new business, but Astralis may give us an insight as to what to expect.

The company has said it expects to report annual net revenue this year of between DKK48 million to DKK52 million (£5.8 million to £6.3 million) and a loss before interest, tax, depreciation and amortisation of between DKK12 million and DKK 15 million (£1.5 million to £1.8 million). Notably, revenue should still grow from the DKK48.6 million generated in 2019 and the loss should still narrow from DKK22.7 million.

That guidance was changed to reflect the disruption of the coronavirus. Astralis said its operations have been unaffected so far but says it is ‘relying on the surrounding ecosystem’. Before the pandemic it was aiming to make between DKK60 million to DKK70 million and a much smaller loss of between DKK3.5 million to DKK5 million.

Although esports is designed to be able to operate without much physical social interaction, it is the physical tournaments that help generate sponsorship and other deals, and these events have been off the table for much of the year. ‘The global COVID-19 pandemic severely impacts the ability to sign new sponsorship agreements and the participation in physical esports tournaments and leagues,’ Astralis warned on August 31. There is no reason to think the same won’t apply to Guild Esports.

How to trade the Guild Esports IPO

You will be able to take a position on Guild Esports shares from the first day of trading, allowing you to speculate on how the price will move – higher or lower - compared to the IPO price. You can use CFDs or spread betting to speculate on where the share price is headed next. Alternatively, you will be able to invest in Guild Esports shares, whereby you will own the shares outright.

Read more: How to trade an IPO before and after listing

Gain exposure to Guild Esports through Blue Star Capital

For anyone hoping to gain exposure to Guild Esports before the IPO, then consider investment company Blue Star Capital. The firm is already listed in London and owns a sizeable 11.7% stake in Guild Esports. Not only will it get a firm valuation for its investment as part of the IPO it may choose to monetise part of its investment. Either way, an IPO is likely to be beneficial for Blue Star Capital as early investors are likely to have paid considerably less to invest compared to the IPO price, even if it is lower than expected.

Blue Star will bring the added benefit of giving you exposure to more businesses, meaning you aren’t putting all your money behind the prospects of Guild Esports but another five esports companies – Dynasty Esports, Googly esports, The Dibbs Esports Corp, Diemens Esports, and The Drops Esports. However, its two primary investments are a 27.9% stake in blockchain payments firm SatoshiPay and a 0.9% share of Sthaler, an identity and payments technology company.

What’s the best way of getting exposure to the esports market?

Esports is clearly a growing market with huge potential and it is unsurprising that we are starting to see more companies in the industry to go public to raise the cash they need to create an early lead and try to dominate the space. However, as we have seen with so many new industries it can be hard to gauge where the value lies, and investors will be understandably cautious when considering to gain exposure to this new industry.

With this in mind, it may be more appealing to consider more established stocks that are set to benefit from the rise of esports, or take a basket approach through ETFs to minimise the risk associated with investing in a new fast-growing sector.

The game makers

One way of gaining exposure is by speculating on or investing in the companies that make the games and software that form the backbone of esports. There is a slew of big-name stocks that are behind some of the most popular esports games around.

Chinese outfit Tencent Holdings is behind two of the most popular online games in the world: Fortnite and League of Legends, and has vast interests in everything from social media platforms to payments companies. Electronic Arts is the master of the FIFA series and practically every mainstream sports video game on the market, like Madden NFL and NBA Live. Or there is Activision Blizzard, which is behind hugely popular games like Call of Duty.

All three stocks have seen their share prices gain serious ground during the pandemic this year. Tencent’s Hong Kong shares have rallied 37% in 2020, while EA is up 17% and Activision Blizzard is up 34%. All of these companies will naturally benefit from a rise in esports, especially as they own some of the most popular titles among esports competitors already.

Unity Software

Or there is Unity Software, which has just launched its IPO on the New York Stock Exchange on September 18th. The company, which owns a games engine that helps developers create graphics for video games, sold 25 million shares at $52 each to raise $1.3 billion and start off life as a public company valued at $13.7 billion.

The fact it claims that more than half of the top 1000 mobile games was made using its technology suggests Unity Software is the perfect way to gain broad exposure to the gaming market and, in turn, the esports market, without having to back a single games maker of franchise. Plus, the fact it sells software elsewhere, such as to the automotive, manufacturing and engineering industries, and is involved in films and cinematics, means it also offers broader exposure outside of gaming. You can trade Unity Software and view its share price by logging into the IG platform.

Esports ETFs

Another option is to take a basket approach by investing in ETFs that concentrate on the esports and video game markets. These ETFs invest in some of the largest and most reputable companies in the market, allowing you to gain broad exposure and spread the risk compared to backing just one stock.

Read more: What is an ETF and how do you trade them?

VanEck Vectors Video Gaming and eSports ETF

The Vaneck Vectors Video Gaming & eSports ETF is the largest relevant ETF available on IG. It aims to replicate the performance of the MVIS Global Video Gaming and eSports Index, and its portfolio is made up of 25 companies, with its ten largest investments accounting for over 60% of the total portfolio.

This includes makers of video games and consoles, like Tencent and Nintendo, as well as others like chipmaker Advanced Micro Devices and Asian online platform Sea. This ETF is available to trade on either the London Stock Exchange or the NASDAQ.

NVIDIA 8.70%
Tencent Holdings 7.80%
Advanced Micro Devices 7.60%
Nintendo 7.10%
Sea 5.90%
Activision Blizzard 5.30%
Bilibili 4.60%
Electronic Arts 4.60%
NetEase 4.50%
NEXON 4.30%
Assets as % of top 10 holdings 60.40%
Total number of holdings 25

Global X Video Games & Esports ETF

The Global X Video Games & Esports ETF is the largest relevant ETF available through IG in terms of holdings, with a portfolio of 40 companies. It aims to replicate the performance of the Solactive Video Games & Esports Index and its top ten holdings make up over 53% of the portfolio, which includes names like NVIDIA, Nintendo, Activision Blizzard and EA. It also includes Japanese game maker Capcom and French peer Ubisoft.

Sea 7.10%
NVIDIA 6.60%
Nintendo 6.60%
NetEase 5.40%
Activision Blizzard 5.40%
Electronic Arts 4.80%
Capcom 4.80%
Ubisoft Entertainment 4.40%
NEXON 4.30%
Bilibili 4.20%
Assets as % of top 10 holdings 53.70%
Total number of holdings 40

Roundhill BITKRAFT Esports and Digital Entertainment ETF

Last on the list is the Roundhill BITKRAFT Esports & Digital Entertainment ETF, which aims to track the Roundhill BITKRAFT Esports Index. It has a portfolio of 30 companies, with the top ten representing over 53% of the portfolio. Although it does hold some of the same companies as the other two ETFs, its top ten holdings are markedly different, partly because it also focuses on digital entertainment and because it is more Asian-focused.

DouYu International 7.40%
Modern Times Group 6.90%
HUYA 6.80%
Tencent Holdings 5.80%
Activision Blizzard 5.40%
Sea 4.70%
NEXON 4.40%
Turtle Beach 4.20%
NetEase 3.90%
Ubisoft Entertainment 3.80%
Assets as % of top 10 holdings 53.10%
Total number of holdings 30

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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