With the Game Developers Conference (GDC) under way in San Francisco and the market moving in our favor, we felt now would be a good time to revisit some of the ways our portfolio is exposed to the gaming sector.
First up, our newest position and the one with the most obvious exposure to gaming, Nvidia (NVDA) . Longtime members will recall that when we originally closed out our previous position in NVDA in 2018, we called out our concern about slow adoption of the company's new Turing-based ray tracing chips.
Our concern about slow adoption was due to the simple fact that game developers were not yet creating content (software) that could fully take advantage of the new hardware. It appears, the dynamic is quickly shifting in Nvidia's favor as analysts at J.P. Morgan called out in a note this morning that "with millions of developers, designers and engineers working on real-time ray tracing on NVIDIA platforms, we expect ray tracing to be utilized and featured in a growing set of blockbuster games in 2019, which we believe NVIDIA's RTX-2xxx gaming GPUs' performance benefits will become increasingly apparent."
We couldn't agree with J. P. Morgan more and would add that bolstering our conviction on this front, Nvidia also announced (here) that some of the biggest names in gaming and graphics including Adobe (ADBE) , Autodesk (ADSK) , Dassault Systèmes (DASTY) , Epic, Unity and more will support Nvidia's RTX line of chips in their 2019 product releases. The reason this matters is because these are the companies providing the software tools that game developers use in the development of those games that will ultimately drive sales of the company's consumer-oriented GeForce RTX chips.
Another major factor that will help drive adoption from game developers is that real-time ray tracing is being integrated into the Unreal Engine and Unity, two of the most popular commercial game engines in the world. Furthermore, in addition to the increased support and adoption of the Turing-based RTX line, Nvidia is opening up the Pascal-based (the generation prior to Turing) GTX line to ray tracing support, serving to increase the installed base of gamers that can take advantage of the new technology.
That said, we would note that the GTX will not be able to perform at the same level of the RTX line of chips. However, we view the decision as a positive as it will serve to make more of an apples-to-apples comparison of the performance difference between the two lines and could ultimately convince many gamers to make the jump to RTX, once they see the potential of what a game could be if only their GPU had dedicated ray tracing hardware (only found on the RTX line).
One other update we would call out relates to the company's cloud gaming push via its GeForce NOW platform. Cloud gaming is the future of gaming, or perhaps the present given the recent announcement by Alphabet (GOOGL) (more on that below). Nvidia is looking to become a key player in the space and increase adoption of the RTX by further developing the platform, this week announcing "new RTX blade servers that are optimized to stream a high-performance PC gaming experience from cloud data centers, including GeForce NOW."
Bottom line, ray tracing games and software tools are set to begin appearing this year and provide the catalyst we've been looking for to jump start the adoption of Turing-based chips. Members can view a summary of CEO Jensen Huang's GDC keynote here.
Another name getting a lot of attention today for its advancements in gaming is Alphabet. The company, known for its artificial intelligence dominance, announced Stadia, an all-new cloud gaming service that promises to eliminate the need for physical hardware (except for a controller, with a Stadia-based one also being announced at GDC) and allow gamers from all over the world to play games, in hi-definition via the Chrome browser, on any device.
While the simple fact that Alphabet has managed to create a streaming service that can so seamlessly play across any device with an internet connection (confirmed with a live on-stage demonstration) already has us excited, the technical specifications of the platform left us in awe. Not only has the platform been successfully tested running games at 1080p resolution and 60 frames per second (FPS), at launch (later this year) it will be able to run at 4K (and support simultaneous game streams). What's more, in the future, management says the platform will be able to run at up to 8K resolutions at speeds of 120 frames per second. For some perspective, resolution of 1080p to 4K with a 30 - 60 FPS is about what one can expect on today's top-of-the-line gaming consoles such as the PS4 Pro and Xbox One S, so the fact that Alphabet is able to hit these numbers on a streaming platform is a statement as to how advanced the platform is and what it can do to disrupt the space.
Additionally, a factor that will no doubt aid in expanding adoption of the platform, Alphabet announced that Stadia will support cross-platform multiplayer. Moreover, as members know, we think online streaming is another huge space benefiting from the growth in gaming.
Alphabet, looking to take advantage of this and further feed YouTube growth, announced the "Crowd Play" feature, which will allow viewers to "jump in" and join streamers playing the game, adding an all new element of engagement to the online streaming community. According to YouTube streamer MatPat (who took the stage during the conference) this will develop a "stronger bond" with the audience. So, not only is the platform serving to aid the company's push into gaming, it should also serve increase YouTube viewer engagement and as a result make the platform more competitive versus the current game streaming leader, Twitch.
Lastly, it appears Alphabet has grander ambitions than simply being the platform on which games are developed or streamed (though that's certainly the primary goal of Stadia). The company is also looking to compete on the developer side, announcing its own gaming content division, "Stadia Gamed and Entertainment".
Members can watch the full keynote announcement below:
Moving onto Amazon (AMZN) , while the updates out of GDC were limited, we remind members that the company has no plans of missing out on the next generation of gaming and has exposure not only via its Twitch streaming platform, but is also seeking to attack the developer side of the equation as well via Amazon Lumberyard (here), a free-to-use game engine that provides developers not only with the tools needed to create AAA games, but also the ability to integrate Twitch support and scale effortlessly via Amazon's AWS public cloud.
While the exposure here may not be as direct as it is with Nvidia or Alphabet, we believe the three-pronged attack -- streaming, game development and the cloud -- provides significant exposure to the space. Developers can use Lumberyard to develop and test games for free (an enticing offer for any developer, especially the indie shops that may be working on limited budgets) and only spend money when it's time to scale, spending only what gamer demand requires thanks to the flexibility of AWS, which again, will be integrated from the beginning.
Finally, there is Microsoft (MSFT) , and while the "Project xCloud" conference won't be held until March 21, we believe this will be the closest compare to Alphabet's Stadia platform. Per the GDC conference homepage (here), "Project xCloud is enabling Console Native games to stream through our Azure-hosted game servers and streaming clients. Any Console Native game currently shipping in the Microsoft Store on Xbox will be capable of streaming to a mobile device. Project xCloud is an open platform with a customizable Client UX where streaming starts with Xbox game developers not having to modify a single line of existing game code." However, while we await further updates, we remind members that xCloud platform was originally announced at E3 in 2018, giving us a glimpse into what we can expect to see later this week.
Note that at the end of the unveil video (below) the team states "We have it up and running today. And when we have it just right, we're going to scale it out in an epic way and deliver it to the world." We will be looking for updates on the scale out at the upcoming keynote.
Members can watch official unveil below:
In addition to the xCloud updates, we believe the company will also detail a similar strategy to the one noted above for Amazon, integrating cloud services with game development when it presents new tools and services it will be releasing to PlayFab (conference homepage here), the company's "complete backend platform provider of services to build, launch and grow cloud-connected games."
Given the developments from Alphabet today, we will be very interested to hear not only how far Microsoft has come in terms of its ability to stream games, but also how it sees these new platforms and the age of cloud-based gaming, impacting its gaming business, both on the console front (Xbox) and gaming PC front (given that the announcement from Alphabet should serve to lessen, if not eliminate the need for high-powered gaming rigs). Additionally, while we would expect this to also impact the consumer-gaming business at Nvidia, we believe this to be the exact reason Nvidia is seeking to double down on the data center and believe that the growth of cloud gaming will serve to offset any future weakness on the consumer front.
A Major Caveat
There is one MAJOR caveat we would be remiss to not call out, as it relates to all companies making a play (no pun intended) at game streaming. While the announcement from Alphabet makes it seem like game streaming is right around the corner, the reality is that today's infrastructure is not yet ready to support the advancements.
We do not doubt the news from Alphabet or the fact that this will ultimately become the future of gaming, but we must not forget that the success of game streaming will rely entirely on internet speeds, as latency can ruin even the most robust gaming experiences. For this reason, especially when it comes to competitive eSports type games, we do not think the platform is, at this moment, ready for mainstream adoption. In-home, it will require the fastest internet speeds available (which aren't available in all locations and certainly not when we consider the global scale) and on the mobile front, we will likely need to see 5G become the standard before we can even begin to think about playing competitive mobile games via streaming platform.
Another factor to keep in mind is that even once high-speed and 5G do become the standard, it is not uncommon for internet service providers and wireless carriers to cap data transfer speeds, posing another obstacle for the companies to overcome -- though we would not be surprised to partnerships develop between service providers and game streaming companies to address this issue.
Bottom line, the gaming space is advancing faster than ever before and the biggest companies on the planet have clearly taken notice. While we do not own any gaming names in the traditional sense (developers such as Electronic Arts (EA) , Activision Blizzard (ATVI) or Take-Two Interactive (TTWO) ), our portfolio has significant exposure to the industry and we believe that overall growth in the space will serve to benefit all of the names noted above.
With PlayStation manufacturer Sony SNE demonstrating an increased focus on content, we would not be surprised if future "console wars" are more about the cloud platform developers choose to create games on, rather than the console gamers choose to adopt. At the end of the day, the success of any of these platforms will depend on the content provided, and that will depend on which company can offer developers the most robust tool set and feature integration -- streaming, scalability, data collection, customer engagement, etc.
For more on this front, members can also view our post (with video) from June, 2018 here. While some of the information may be dated (nine months being an eternity when it comes to the market and technology) many of the themes and company initiatives called out above are addressed and remain largely intact.