Do Not Miss This: The Top Video Game Stock for the Next 12 Months

October 29, 2018 Do Not Miss This: The Top Video Game Stock for the Next 12 Months Investors absolutely love the video game business. Last week Katusa Research put out a series of research essays on the video game sector and featured Axion Ventures (AXV:TSX-V) as a standout company in the sector. (You can read the full featured report on Axion [right here](. In case you missed last week’s research, we’ll get you up to speed quick. On Day 1, [you learned about a sector]( that will knock “old sports” off its pedestal. And how some of the biggest athletes in the world are getting involved in video games – in a big way. On Day 2, [we revealed how a single video game called Fortnite]( $1 billion in just the first five months of the year. On Day 3, we introduced you to [the video game and publishing giant, Tencent](. It owns the world’s largest gaming and social media companies. And it’s one company that can make or break a video game. The key takeaway from all our research is this: Video games are a massive industry that you need to pay attention to. It’s where Bitcoin was in 2016. Where cannabis stocks were in 2015. The video game industry has the potential to be a massive bull market. Developers are in high demand. And so is investor appetitive in games that can make an impact. The good news is that a game doesn’t even have to be a hit to make money. Games that aren’t even discussed in North America are making hundreds of millions of dollars of revenue per year for the companies that own them. One of the best grossing PC games of all time—another free-to-play shooter—is a game you’ve probably never heard of before. In fact, if you asked your kids, chances are pretty good that they’ve never heard of it before either. CrossFire, developed by a South Korean company and first released in China in 2007 by Tencent, is a game that never really took off outside of Asia. In 2014, CrossFire had the highest revenue of any video game in the world. By 2016, it had raked in a total of $6.8 billion. Even more important, the cash flow has been consistent since 2013. Another benefit for the developers of video games is that the cost to produce the game is recovered very quickly. The launch of CrossFire, a game that is virtually unknown outside of China, recovered its full capital cost to build the game in the first four months after release. Other than minor costs to maintain the game with new options, the full revenue is essentially converted into earnings for the owner of the game. The major success of CrossFire proves that a game does not need to be on the tip of every kid’s tongue to make an absolute fortune. Video Games will no Longer be a Well-Kept Secret You still don’t really hear anyone talking about video games. News stations might talk about the latest hot game or app release. And business shows might discuss earnings at big video game companies such as Electronic Arts or Nintendo. For the most part, though, video games seem to get glossed over by the media, as if they are irrelevant. The industry is dominated by established developers like Take-Two Interactive Software Inc. and Electronic Arts Inc., which crank out predictable updates to franchises like Grand Theft Auto and Madden (now in its 29th version). There are a few massive investment opportunities sleeping just beneath the surface of the water here—unseen by most. A few small companies have moonshot potential. And thus there is an opportunity to make a once-in-a-generation asymmetric bet. [Join Marin Katusa on Facebook by clicking here]( [Like our Facebook page here.]( The Special Situations team at Katusa Research is looking deep into several opportunities right now. And our top opportunity is in a company called Axion Ventures (AXV:TSX-V). Axion has an outstanding management team led by: John Todd Bonner When we first met Todd, the first thing that came to mind was that this guy’s life story could be made into a Hollywood movie. After a short stint, Todd left investment banking to work on start-ups, most of which were wildly successful. Todd also spent many years working closely with Richard Li (one of the richest billionaires in Hong Kong) and his Pacific Century Group (PCG). Todd’s first foray into the video game industry was around the turn of the millennium when he tried to mount a takeover of Activision through Pacific Century CyberWorks, a subsidiary of PCG, though that deal unfortunately fell through due to billionaire politics. Even then, Todd was already convinced that gaming, and in particular online gaming, would blow up in a significant way – especially in China. Wil Mozell Wil spent a decade in senior roles working under Don Mattrick, the founder of Electronic Arts Canada. In 2007, he co-founded BigPark (with Mattrick) and sold it to Microsoft 2 years later. Wil left his position as General Manager of Microsoft Studios Canada to join Axion’s board last year. With his 20+ years of experience producing video games, launching over 50 games, and helming game studios, Wil is the perfect man to direct Axion’s day-to-day and development operations. We’ve met with this team and hold them in high regard. This is a world-class group of leaders who have skin in the game and who have a proven track record of wins in the industry. Axion’s flagship asset – the video game Rising Fire – was just released in 2018. Major video games tend to have a staged release cycle, beginning with “alpha” and “beta” tests. These tests involve releasing early versions of the game to a select group of gamers. Gamers are usually invited at random from a pool of applicants. This way, they can assess the software and provide feedback on things like gameplay and features. While these tests are good ways for the game developer to fix bugs in their game, it’s also a good way to gauge interest in the game. What to Look for in a Startup Video Game An important metric to look at for any game is the “retention rate.” The retention rate refers to the percent of people who are still playing the game after a certain period of time (in essence, how “sticky” the game is). When you open up your phone and look at your apps, you probably see some that you haven’t used in months. Others you probably haven’t even touched since installing. It’s the same for video games. With fast internet, it’s very easy for people to download a new game, try it out once and never play it again. So it’s important to see how many new players are still playing the game days or weeks down the road. Retention rates fall most sharply between the first day a user downloads a game and seven days after. After that, it typically only falls by a couple of percentage points each day until the 30-day mark. After a month, retention rates stabilize. That’s why 7-day and 30-day retention rates are the most often used benchmarks when analyzing a game’s staying power. If you look through Axion’s news releases, you’ll see that Rising Fire achieved a 30-day retention rate of 54%. And this was during its closed beta test in late 2017, before the game was released to the public. In other words, a month after the game launched, 54% of the people who originally downloaded the game were still playing. This is a very high number, but that’s mainly due to the nature of beta tests. Closed beta tests are only open to a select number of gamers who are invited to participate from a pool of people who apply. So the only people who downloaded the game in the first place are ones who already had enough interest to sign up for a chance to participate in the game’s beta test (over 100,000 gamers). A more interesting number for us to look at is how the game did after its public launch, which is listed in the table below. The number that stands out is Rising Fire’s 7-day retention rate: 20%. To put that number into perspective, the average 7-day retention rate for new mobile games sits just under 15%. For Axion’s partner Tencent, the mark used to judge a game’s success is also 15%. Put simply, Rising Fire has done markedly better (33% better) than its peers in terms of being able to keep its players interested enough in the game to keep playing. The game had a major update at the end of August, and retention rates following the update spiked up to 26% during September. This is excellent. It means Tencent will be looking to invest more resources like advertising dollars into Rising Fire. These are exactly the catalysts that could propel Axion shares higher as the new numbers continue to roll in. To view our comprehensive report on Axion Ventures and the Video Game Industry - [Click here]( on the picture below: The Opportunity of a Generation: The Ultimate Score on a Digital Gold Mine Regards, Katusa Research Disclosures and Disclaimers: Katusa Research and its directors, employees and members of their households indirectly own shares of the following Companies which are described in this publication: none. Katusa Research receives cash compensation with the following companies which are mentioned in this publication: Axion Ventures. Therefore, the company mentioned is a sponsor of this publication. Therefore, Katusa Research is extremely biased. From time to time, Katusa Research and its directors, officers, employees or members of their immediate families, as well as persons interviewed for articles and interviews on KatusaResearch.com, may have a long or short position in securities mentioned. 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