The Canadian Investor - Big Gains in Video Games

Episode Date: October 8, 2020

After a one week hiatus, we are back with a new episode of The Canadian Investor Podcast! In this longer than usual episode, we talk about the video game industry and where we think this long term trend is going. We finish the episode with a discussion on the canadian banking sector. Tickers of stocks discussed : TTWO, EA, MSFT, ATVI, U, NTDOY, SNE, NVDA, TCEHY, SE, AMZN, GOOG, FB, TD.TO, BNS.TO, LB.TO, CM.TO, RY.TO --- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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After a week off, we're switching podcast platforms. But we are back and now the podcast is on every single platform that exists. What's going on, Simon? How you doing, man? Hey, I'm doing well. on every single platform that exists. What's going on, Simon? How you doing, man? Hey, I'm doing well. Excited to be back. It'll be kind of nice to upload that through a new platform and make sure we reach as many people as we can.

Yes, sir. The reason that we switched is because it was hosted before on my old platform. But now with Stratosphere 2, I'm on a new platform and we decided to take the podcast elsewhere. So that's another plug. Stratosphere 2 is available at stratosphereinvesting.com. If you can't remember that, getstockmarket.com is now redirecting to Stratosphere 2 because now the screener that was low tech before is now high tech.

So I'm very excited for you guys to check that out. GetStockMarket.com will bring you right to Stratosphere Investing. All right. Today we have a jam-packed show. We're talking gaming primarily at the end of the show we're going to talk about canadian banks as well because we've been getting lots of questions from listeners so that'll be a small segment at the end of the show but gaming is a industry sector that i find very interesting. Simon finds very interesting. But let's not be confused here.

Neither Simon or I are currently gamers. So if you were a gamer and you're going, WTF, man, that's okay. We're not pretending to be gamers. We don't know the industry. But from an investment perspective, I think we have enough research under our belt to have you a good show today. Simon, were you ever a gamer in your lifetime? Oh, yeah.

Yeah, I was a big gamer when I was younger. So definitely old school gaming. So if we have some older listeners, they may remember, you know, Doom, Quake series, I was really into that when I was, I think, early teens, just started high school, so those were kind of the classic games where I would try to play multiplayer with dial-up internet, that was interesting, the guys would just kind of lag all the way through, but yeah,'ve always i mean i still play a little bit of games here and there but uh as you get older more responsibilities uh less time to kind of have some fun and play games but definitely um still enjoy them from time to time i can see why

it can be a really interesting area for people to invest in so that makes two of us that are former gamers because when i was a kid my mom could not get me to turn off call of duty like that was my thing in high school is come home fire up the xbox and play call of duty with my buddies and now that was a thing. That was a big period of my high school time spent. And before that, I played all kinds of computer games. Like, I was that nerdy kid. Now, same thing. I can't even find a second in the day where that would be possible. But I wish it was possible.

Maybe with the new console cycle maybe i'll buy myself an xbox or ps5 probably not but we'll get into that so there's a couple interesting trends that are happening that we're going to talk about so this covid environment has accelerated gaming in a major way. Every single company you can think of in the gaming space is record-smashing quarters right now. Like, unbelievable acceleration and growth and in player base and time spent. So Activision Blizzard, the developer of the Call of Duty flagship franchise,

saw a 30% increase in players and a 70% increase in time played in the ecosystem. And Call of Duty Warzone driving a lot of that growth. But that is really impressive. And it's not just Activision Blizzard, EA, Take-Two, all these companies are reporting massive acceleration and smashing growth, revenue, margins, everything. So it's very interesting. Another trend to think about is mobile gaming. People playing games on their phones is the fastest growing segment.

And this surprises me. Simon, do you ever play games on your phone? A little bit. I mean, I think like everyone, I've played Angry Birds and Candy Crush. That's the other two I played. birds and candy crush um that's the other two i kind of i played aside from that not really um yeah i kind of stick uh stuck more to pc games yeah me too i don't see the appeal so this stat goes contrary to what you would think i guess it's it's obviously a more casual gaming environment, playing on your phone. I don't see the appeal whatsoever. But hey, the numbers speak for themselves.

This is the fastest growing segment in gaming. So that is interesting. Well, it also has the widest reach, right? So in a lot of cases, people just can't afford either a console or they can't afford a PC gaming rig, which will cost you even more than a console. So it does have a lot of reach. That's definitely the advantage for it. Right. And with every single developing nation now, every person is getting a smartphone before they get, let's, let's say gaming console or a computer, this is a way for them to play video games. So in that sense, on a global perspective,

makes a lot of sense. So another couple interesting things coming out, Sony obviously unveiling the PS5 and the PS5 digital version, which it does not have a disc and then xbox coming out with the series x and series s which is kind of the equivalent of that and uh there's other hardware players to play this space like nvidia has the really uh powerful gpu and and there's we've talked about this before we started recording so i mean do you want to just mention xbox is pretty innovative like hardware as a service low like zero cost to get the console and then you're on a bit of a subscription yeah yeah no so uh xbox is pretty cool what they're doing so i had the paste right in front of me and now i think I lost it but essentially what they're offering is they're

offering people to get a console with no upfront costs and they also get the membership included in that so that's kind of that's pretty cool because it does give people the opportunity to get the latest console but also gives Microsoft reoccurring revenue. So they've had two options just on top of my head. I believe the first option was $35 a month for the more expensive console, which is the one that has the classic CD or disc, and then $25 a month, and when I say those amounts, they're in US dollars,

$25 a month for the console that's more more digital so you can't really buy a physical disc you have to download everything digitally and also includes a 24 months subscription so that goes on for 24 months those payments it is more expenses obviously than if you were just to buy the console but it may actually reach a lot more people in terms of getting that console into their homes and then potentially selling more things to to those players via like in-game right so it's pretty very interesting idea from microsoft i'm not surprised um and microsoft even i don't know if they're going to be making money or not on that. But even if they're losing a bit of money, Microsoft is such a huge company. It's so profitable.

They can afford losing a bit of money for potentially getting more customer and higher margins down the line. So you have to be impressed with what Microsoft is doing from that perspective. is doing from that perspective and i think this is genius because companies like microsoft and sony that do have lots of money microsoft especially of course getting the console like the hardware aspect into the home and then being able to pull that recurring revenue stream once you're inside of that ecosystem makes a lot of sense like at this price point and how complex these systems are i wouldn't be surprised if if both for microsoft and sony on a per uh per console is a loss leader up front. I would not be shocked at that. I haven't looked into the economics, but you got to think that that's where the ecosystem is going,

especially we're seeing now the games we're talking before this, like the pricing and the model has completely changed. The games seem to have little to no pricing power over time. They were 60 bucks when the consoles came out, and they're still like, what, $60, $70? Yeah, and they were still $60 back in the day in the 1990s when I started gaming, and that hasn't changed. But again, it's a different model nowadays,

but the pricing, and we were talking about that it's i was kind of surprised where you'd pay back in 1995 60 bucks for a game and today it's about the same price but again now you know they'll sell in-game there's other ways of them for monetizing that uh but no it's it's interesting to to kind of think about it. Yeah, so the models completely change, right? Because Fortnite, owned by Epic Games, they came out with the Smash Hit Fortnite that was free to download. So all of a sudden, there's no risk, right?

There's no buyer risk to trying out and playing the game if it's free to download, free to start playing. And then now they have this micro transactions of in-game purchases available and that model seemed to be super powerful and and seems to be where it's going um so although the pricing of these games hasn't changed it looks like the d to c game model has improved margins so maybe revenue hasn't changed but you're seeing this i'm just going to give you an example for the past 10 years activision blizzard if you were to compound annual growth rate actually only has a 5% revenue growth. And now this is accelerating in 2020 with COVID, but 5% revenue growth for a stock that trades at 34 times earnings is not very impressive. However, they've had over 30% on earnings per share growth and

well over 10% on the dividend because they pay a dividend as well. And margins have increased. Well, obviously you can tell by that math. So these businesses are changing in the way that the model is set. So we're going to get into a few of these names, but a couple other trends we want to talk about. So streaming is a big thing so there's twitch from amazon there's facebook gaming which is which is new and they seem to be shoving that down uh users throats and then microsoft had their mixer uh stint which has now closed so that was a pretty big fail from microsoft but they gave it a shot um i guess youtube youtube youtube youtube is yeah in a major way i mean all the like big influencers if you will of gaming they'll have

people watching them live and in their recorded uh videos do you do you get this streaming like the watching other people play video games is now as much of a user base as people playing them themselves so do you get this I mean it's hard for me I I know some people are trying to compare it to sports and I think it's I mean I guess some people do enjoy watching other people play. I don't personally really enjoy it all that much. But the one thing I do enjoy on Twitch and I will watch from time to time is, as you guys know, I do enjoy playing poker. And there's some top pros that will actually stream live with a 10-minute delay. Because obviously if you end up on their table, you don't want to be seeing their cards.

a delay because obviously if you end up on their table you don't want to be seeing their cards right so that is like to me that's probably the one thing i like it because you can actually see how the top poker pros uh what you know how they're thinking how they're approaching different situations but from a pure like you know watching someone uh playing fortnite or something like that i'm like i mean i think i'll do something else but i know i know it's very popular so and it's a pretty big uh growth trend growth trend so i'm sure it'll keep growing going forward yeah yeah totally and if it's like anything right if if you are very interested in something and the best in the world is it's very impressive to see someone who's elite at that thing you are very interested in i get it you want to you want to watch the skill

um and that's kind of just like any live sports you watch so i i do get it. I mean, at first I didn't, but I think I do get it. I do get it. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly

what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US.

Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. So let's get into a couple of these names. So the biggest

game developer, well, it would actually be probably Tencent in all their investments, but let's get to Activision Blizzard. $61 billion in market cap. We mentioned 5% revenue growth, but accelerating. 11% on the dividend. Pretty impressive, over 30% earnings per share growth. It trades at 10 times sales and over 30 times earnings. Margins at 70%. Gross margin's pretty impressive.

Margins at 70%. Gross margins, pretty impressive. Their Q2 reported 30% increase in players and 70% increase in time played. You can't not talk about Call of Duty when you talk about Activision Blizzard. That is their flagship game. And the underappreciated part of all of these developers i think is this revenue doesn't seem recurring because you're not on a subscription but the staying power of a

flagship like call of duty people buy this game every year, no matter what. It doesn't matter what it's called. People buy this game every single year. That sounds like recurring revenue to me. Yeah, it's a very, and you'll see, and with all, like, I'm sure we'll talk a bit more about other gaming companies too, but typically the ones that will do the best is when they have a flagship franchise like Call of Duty, for example, because they'll be able to come out pretty frequently with some either expansions or new titles related to that franchise, and they'll usually have a pretty big following. And Activision Blizzard, obviously Call of Duty,

but some other franchises that they have that people are, I'm sure, familiar with, maybe not as big, but there's Candy Crush, there's Diablo, Tony Hawk, a bit older, but World of Warcraft, Overwatch, and Starcraft are all big franchises. Obviously, Call of Duty is probably the most popular one right now, but I know these other franchises

have some big followings too. Yeah, Candy crush was the number one grossing app in u.s app stores uh again i i mean hey you can play it while you're at the way you're in the washroom so i guess yes you you certainly can you certainly can um very surprising to me but it is a game though that attracts like my girlfriend likes candy crush i think candy crush you know people can think whatever they want it's very simple i get it but you know i think it attracts a lot more women than a lot of the other titles i just mentioned so you know it makes sense that it's it's that popular they have something

for everyone you're right the demographics they're serving it up i when i think of these gaming companies and the intellectual property that makes up that 61 billion in market cap is the worlds that they've built the characters characters they've built. It's like Disney in terms of Disney can continue to pull levers from this, these worlds and characters that they've created. They can continue to generate revenue and shareholder value from this intellectual property. And gaming feels very similar in that aspect um to disney do you see that comparison or am i my stretching this bit no i think that's totally true i think um those franchises do have a staying power but again i think there is a limit to their staying power i

know diablo for example i was a big fan It's still a big franchise, but it's definitely not, I don't think, what it used to be. You can do World of Warcraft, Starcraft as well, but those franchises can span over multiple decades. So I agree from that standpoint. standpoint yeah because i mean the number the best game on consoles in terms of sales call of duty year after year i think eight of 10 years in the 2010 decade was call of duty in terms of number one sales and let me tell you i was contributing at some point in that decade uh to to buying those titles every year. All right, moving on. EA. EA is the $36 billion in market cap.

Consistent, steady rev growth. Again, another smash quarter from them. Revenue very recurring, in my mind, with the sports games coming out year after year. They can continue to pull that. Some people buy that every year no matter what you know they're getting nhl 2016 17 18 19 20 even if there's no changes they want to see austin matthews on the cover of nhl 20 in their living room and uh he's pretty good at hockey so

i can't i can I can't blame them. Similar gross margins, a little cheaper on valuation, eight times sales, 19 times earnings. This seems like the boring stalwart of the group in my eyes, but posting some pretty impressive quarters. Did you ever buy these sports games? No, no, I wasn't really uh big into uh sports games i had like stanley cup 90 1994 i think that was one of them that i had where you can like depending like if you did a shot from a certain place in the game like on the opposition um you would always get a goal it was like those one like glitches on

Super Nintendo but whether it's EA or you know Activision Blizzard or any of the other major one I think take to interactive as well yeah what I do like that these companies are doing is you have some subscription models and you have kind of a two-tier where once here gives you access to a bunch of titles that are older but still look pretty nice and for a lot of gamers including myself those are really attractive because I'm looking at EA and it's five dollars a month or thirty dollars for the year and you have access to hundreds of titles they may not be the most up-to-date ones but you know if I'm looking to play every now and then and I don't

really care if I'm getting the most up-to-date NHL version versus the one that's like three years old and very similar graphics that's really attractive for someone like that and then you have the other option where it's the more premium subscription more expensive but you have access to a bunch of newer titles so I think that's really smart what they're doing. It gives them a reoccurring revenue and gives them a different kind of clientele that they can get some revenue from. Yeah, and it looks like that subscription's part of that Xbox All Access Pass that's coming out.

So that's a pretty smart partnership from EA and and being on the subscription model in terms of actually locking in customers makes sense to me because their games are the the ones that come out every year um so people who like those games may as well just be on that subscription because I think they're going to end up saving a little bit of money than actually paying for those titles every year so So if there's value for the customer, that makes sense. And then EA gets to lock you in. It makes sense to me. I remember Madden 2004. You could play as Michael Vick and he was like a 99 overall. You could play as Michael Vick, and he was like a 99 overall.

And it was absolutely absurd whether you threw the ball or just decided to run every play. He was virtually untackable. And if anyone remembers cheat code Michael Vick into Madden 04, you'll know what I was talking about. He's kind of gone down as like a legend in sports games history is michael vick oh four um good nostalgia there all right moving on take two interactive 18 billion in market cap uh 12 percent compound annual revenue growth chunky revenue growth because this is probably of the ones we've mentioned so far has a longer cycle in the

games most a lot of them are single player story games uh in 2019 48 percent revenue growth you can see the chunky there and 47 and 93% in 2013, 2014, respectively. What happened there? Well, GTA V came out, which is one of the biggest best-selling video games of all time. NBA 2K, Grand Theft Auto, Bioshock, Outer Worlds are some of their titles. So the longer cycle,

but these games are a hit and have big big staying power um did you ever play grand theft auto yeah yeah i played the the old school one on super nintendo come on it was on yeah i didn't even know that yeah that's when it started it was like 2d it was awesome you could like you could burn people in 2d blow up cars like shitty graphics but yeah it was it was really cool i mean obviously but uh yeah take two interactive uh is a great company i have good title they have red dawn redemption too they're dead yeah so that's a good game yeah it's a good game yeah and i think that has all the makings of a really good franchise but uh one thing i wanted

to mention whenever people are looking especially as these uh like bigger kind of blockbuster companies that have these big franchises keep in mind that the revenue the increases in revenue that they may get you'll have to look at it over a longer period of time because it can be cyclical because of when those titles will come out so it's possible from year to year you'll have to look at it over a longer period of time because it can be cyclical because of when those titles will come out. So it's possible from year to year you'll see a big drop. You really want to look at them on a more like say a 5 to 10 year basis where you can average out the revenue and get a better idea of how they're increasing their revenues and their profits over time.

Yeah, that's a good point, especially with Take-Two. The cycles are longer. Like, Bioshock does not come out every year. By the way, that was a really good storyline. I remember playing that game. So those are the three that people talk about a lot on U.S. markets. Different business model. Just very, very recently IPO'd.

Unity. Ticker U. This is my personal favorite biz model in gaming. They operate under the create solutions and operate solutions. Those are their two segments. So the create solutions. Those are their two segments. So the create solutions, about 50% of games are built on their engine. And they have an even bigger market dominance in mobile. So that excites me based on the numbers coming out of mobile. So developers use the Unity game engine to make their games and then operate solutions is also interesting so post-launch you know the advertising ads the servers the uh the content delivery in the cloud that's can also all be done on unity so developers can develop the game and deliver the content of the game through unity

they just ipo'd but they have a massive market share like i said roughly 50 percent of games are built on unity's engine and that's roughly 20 billion in market cap today roughly 20 billion in market cap today. This is a company with long, long runway for growth. They're not profitable, not generating cash flow, but revenue growth is explosive, of course. And this as a service, this is the truest as a service in gaming that I can think of, I really like Unity. And I don't buy IPOs very often, if ever. I always say IPOs stand for it's probably overpriced. But, damn, this is a really good business model.

Yeah, I remember back in the day some of the big game engines were, I think, Unreal Tournament was one. Half-Life was one, if some of you are familiar with Counter-Strike. So that was built on the Half-Life engine. So I remember back in the day, you had the games that actually were the base engines, and then they'd have spin-offs based on that. But now it's changed a bit. That's my understanding, least of Unity is now they, like you just said, they provide that game engine.

Yeah, yeah. And the other, let's say roughly half of the market is built on the Unreal Engine owned by Epic Games. So that's a good transition is Tencentcent although they are this massive conglomerate in e-commerce payments gaming you name it in in china mostly they have a 40 percent stake in epic games and a over 90 percent stake so they they basically own all of Riot Games, the flagship seller of League of Legends. And if you haven't heard of League of Legends, well, you're probably living under a rock

because everyone and their dog plays this game, it seems like. And it's been around for a while now. And there's still a ridiculously large player base to it and uh tencent among all other things that they are massive in gaming is huge for them and and as a shareholder you can probably speak to that yeah oh yeah definitely i mean i'm happy shareholder of tencent and definitely gaming as a whole i think is something i'm i might be doing a bit of a basket approach i think you have a lot of good companies and you don't need to necessarily pick you know one or two uh you could easily have a basket approach of like five six companies and you keep an eye on them but you don't necessarily need to

be on top of them as much as you would be if you only took like picked one for example yeah yeah totally and i you say that but then the other counter argument that i'm thinking that not only i'm thinking of but other people will be is that a lot of these companies are consolidators that we've talked about already so you can kind of think about which one you think is the best management team and if you don't know that or don't have any insights on that or you're not a gamer yourself um then maybe what simon is saying is the play. But a lot of them are kind of diversified already in terms of the games that they sell.

They are consolidators. So that's something to think about as well. But my God, Tencent is dominant in gaming on a global scale among everything else that they do in China. So it's really hard not to like that stock another international one of course nintendo the switch has been a shocker to to financial markets isn't that always the case with nintendo it's like everyone thinks they're they're dead and then was the we back like what uh 10 years ago or maybe a bit

more and then you know they had nintendo switch and it seems like you know you always think they're gonna kind of fade off and sell off into the sunset and they come out with something that's usually popular usually with the younger demographic yeah and like it's funny like i i play more nintendo n64 up at a friend's house playing mario kart smash bros what's that golden golden eye yeah literally golden eye and playing smash bros uh having a couple drinks versus the switch which is the number one selling console on the planet at the moment i actually um i got the super nintendo um the retro little like a console you know they came out with that a couple years ago so my girlfriend and i play i play that together we'll play uh super mario world mario kart um like the

graphics are hilarious but kind of reminds me when i was a kid so we kind of like it yeah the nostalgia in gaming is is unbelievable so yeah i mean the new sony and xbox consoles are coming out so we'll see how that works but as soon as you count out nintendo i have no stats to back this up but this is how how it feels is that their launches seem to suck when the new consoles come out um and then they have this like breakout later in the console cycle it seems to me what it's like again no stats to back that up given all this simon and put it i put this on the show notes and i don't even know if you've noticed it. You got to pick one.

Tell me why that you would buy. You only get one. Yeah, just one. So I'm not going to say Tencent because I already own it. Only one. You know what? I think I would probably go with Microsoft. It's just because their business as a whole, if you just leave out the gaming is so strong, Microsoft can really afford to try new things that may be hugely profitable, but they could be losing money in the short term. And it's

just, even if you compare it to Sony, I think Microsoft has a huge edge on them. It's just the financial resources that they have, their management, their leadership. They can really have more leeway and try new things. And it's also, you know, obviously owning Microsoft, you own a lot of different businesses as well. So I think that's the play I would go if I had to just pick one. That was not what I was expecting, and that was boring, and I'm disappointed. Sorry.

Or Sea Limited maybe. Sea Limited. We didn't talk about Sea Limited. Yeah, you didn't talk about it. That's why I didn't mention it. We didn't talk about Sea Limited. This is a good opportunity to talk about Sea Limited. It's basically 10 cent for the rest of Southeast Asia,

payments, e-commerce and gaming uh their g arena platform has hundreds of millions of daily users so if you had to pick one insane uh if i had to pick one see se's been on on my radar earlier in the the covid pandemic and the stock's up 350 percent since then so whoops i didn't buy it um i'm not going to say ten cent either because on the last podcast i said that it was very very high on my watch list to the point where i really want to start a position for all of the reasons mentioned uh gaming aside but gaming obviously being a big part of that. I am going to go with the new IPO, Unity. I think, yes, it's a new IPO,

but the business model is not new. Their market share in gaming is not new. Like I said, 50% of the game is built on it. I see that accelerating with them being so important in terms of mobile gaming development. The numbers speak for themselves. That's going to continue to grow. And this engine that they've built,

I'm going to go off on a little tangent here in my own experience. I'm going to go off on a little tangent here in my own experience. They build very, very cool engines that other industries can use. So I'll give you the example. There's a company that builds for real estate companies, this massive interactive touchscreen experience for new condo developments so that people can go into the show home see the entire development that's being proposed and it's not just like a 3d rendering it's so interactive you can play with it you can click on it it'll open drawings it's a very very cool experience and seeing it is believing it you're kind of in awe when when you

see it and that's all built on unity's platform so in terms of what creators can build on it i look at unity as a very similar business to Adobe. Adobe is the platform where creators can build from in a software-as-a-service model, and then post-launch, the operate solutions, they can continue to have those recurring revenues. So like Adobe, there's different packages you can buy everything from Unity Pro, Unity Enterprise, to Unity Personal and Unity Student. So depending on what kind of the video game developer you are, there's different tiers and models for you.

So I think of Unity in gaming as the Adobe business model. And I don't know if you've checked recently, but Adobe's done pretty damn well over the last 20 years. They're not generating free cash. But this is long term going to be a very, very big company. just do a basket approach, probably pick six or seven of what I think are the best names and just kind of build a basket approach because I really don't think it's a winner-take-all. I think there's going to be a lot of players, probably winners, not maybe multiple winners like in terms of dozens and dozens of winners, but there's probably going to be five, six companies that will do very well in the next decade or so. in terms of dozens and dozens of winners, but there's probably going to be five, six companies that will do very well in the next decade or so. You're right. It's not a winner-takes-all.

It's a very big pie, and the pie itself is growing. The total addressable market itself is growing, so there will be multiple winners, and there will be lots of very, very successful investments in gaming. So you can go pick one or you can go the route that Simon's suggesting, which is also legit. Can't go wrong. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them,

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every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees,

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Please check out the link in the description of today's episode for full disclaimers and more information. All right, shifting gears. Not as exciting as gaming. Not as exciting as gaming. Canadian or banks in general, but probably a bit more focused on Canadian banks. Okay, so I guess I'll start with that.

And we'll just do a bit more of an overview. And we can always come back to Canadian banks in a later episode. So I won't talk about or we won't talk about like the nitty gritty of specific banks. talk about or we won't talk about like the nitty gritty of specific banks but some of the things you'll want to consider if you're you're looking into starting a position in in banks in general and Canadian banks so in terms of the ratios and this was a bit inspired by one of the posts that was on stratosphere to one of the community users, was wondering, you know, why do people use a lot of ratios that are specific to equity, assets, liabilities? That's because those ratios are really useful for banks, whether you look at the, you know, the price to book ratio, whether you look at the assets compared to liabilities or

equity in the overall bank. That's because loans are shown as an assets and deposits are shown as liabilities on banks balance sheet. So you really, the short way of putting it is you want to almost like cancel those two out to see how much net assets the bank has, because that'll show what they truly have in terms of what they're worth. So you cancel out what they have in terms of deposit and loans, and then you see what the bank really, you know, is worth in terms of its assets. So those are really useful. Price to book is very useful for banks as well. You want to look at the whole industry, but also historically for that specific bank. And I say that for banks as well you want to look at the whole industry but also historically for for that specific bank and i say that for banks but price to book i would kind of be careful for a lot of

other industries or it may not be useful at all but definitely for banking it's a useful ratio to use so some of the other things like leaving out ratios specifically that you'll want to look into. So what's the overall interest margins on the bank's loans? So interest margin is just basically what the bank is paying out in terms of interest on its deposit versus what it's getting in terms of interest on its loan. So the higher the spread, the better for the bank because a lot of the bank's revenue will come from that interest margin. Typically, as interest goes down, like we are right now, so the lower the interest rates, the more squeezed that interest margins will be. So that's why you hear a lot of people saying, well, it's not a good environment for banks. So that would be one of the main reasons that it's not.

So what type of bank is it? So there's different types of banks. They're not all created equal. So you have consumer retail banks. So banks that specifically aim to provide loans to, you know, everyday people like you and I, Braden. Commercial banks, which will provide a bit more loans to uh you know commercial businesses to businesses investment banks so you'll have um like a classic investment bank brayden do you have one i have one on top of my head but i know you'll you'll probably guess it

a classic investment bank yeah the one name that probably comes to mind a u.s name i'll be jp morgan golden yeah jp morgan go i was gonna say golden sack is probably yeah golden sacks is the is the name yeah so investment banks what they'll do is uh typically those investment banks they'll be the ones involved in ipo so pricing the ipo and they'll get quite a large fee for doing all of the IPO process when a company is going public. But again, these are all the types of banks that you could get. Is it concentrated in one of the areas that I mentioned or is it diversified? The more concentrated it is, the more risk it can have if that type of concentration goes south. Another thing you'll want to look into is it geographically diversified

or concentrated in a specific country. And in Canada, you have to really be careful about that because a lot of the Canadian banks are very concentrated in Canada. There are some that have a pretty large presence elsewhere. So names that come to mind, TD has a pretty big presence in the U.S. Bank of Nova Scotia, I don't know if you've traveled in, well, you did travel in South America and Latin America, so they have a big presence over there. Scotia does have a big presence in South America, and it's always kind of weird to see. You're traveling, and you see a Canadian bank branch. Very, very odd. Cambodiaodia i was in cambodia national banks are everywhere yeah i mean even i had trouble with i had trouble using my canadian

debit cards at both of them get that yeah so it's just um those are just some of the things you want to ask yourself because obviously you know it's not there's not a right or wrong answer in all of these. But just be aware, because the risk will change. You know, if there's for Bank of Nova Scotia, if there's a lot of unrest going on or a lot of, you know, inflation going on in South America or Latin America, that could create an issue for them. So that's something you'll want to look at. So another thing you want to look at is a concentrate in a specific type of loans. For example, CIBC has a lot of residential mortgage loans in Canada. So that could make it quite vulnerable if there's a housing downturn in Canada. I know TD has a pretty big mortgage division as well,

but they're a bit more diversified between the US and Canada. Another thing you'll want to really look at right now and listen to the conference call just to see what management is saying in terms of loan loss provisions. So loan loss provisions are money that banks are setting aside because they think that people will not pay their loans. That's essentially what it is. There has been an increase in loan loss provisions this year for obvious reasons. So you want to definitely keep an eye on that and just see what management is saying. A good place where you'll be able to find some really good information because banks are quite complex to look at but i find that the supplemental financial information that is released every

quarter is really really useful for banks they actually break it down by country by segment by overall loans so it is something that i would strongly recommend that you look at if you're thinking of, you know, starting a position in one of the Canadian banks. Another thing is, is it, you know, a traditional bank or is it an online bank? So that's really important because a traditional bank will have branches, which definitely comes with higher overhead costs, whereas a online bank will usually have higher margins because a lot of their staff well it doesn't require as much staff so they'll usually be a bit more profitable when it comes to that so another thing you'll need to ask yourself is where do you think interest rates are going and don't ask brayden and i because don't have a clue. Do you have a clue, Braden? My mic was muted.

Do I know where interest rates are going? Absolutely not. And they're very low. I'll ask Powell. I'll let you know what he says. Yeah, or I guess it's not Mark Carney anymore. Anyways, whoever the new Bank of Canada head is. Look how relevant he is.

We don't even know. Yeah, exactly. Well, he just changed like a month or two ago. It just changed. It just changed. Yeah, so that's to my defense. So that is something you'll want to ask yourself. And don't be fooled. Like interest rates are low, but there are countries in Europe where they are seeing negative interest rates.

So it doesn't mean that it cannot go into negative. So keep that in mind. And one other question I would ask myself, does it get most of its investment banks, but also like TD or all the different Canadian banks? I think they all have like self brokers or brokerage. Some of them offer wealth management services as well. So you'll want to look at that, see how diversified they are. I think you guys know what we think about fees and banks in general. And you'll have to factor that in if they get a lot of money from their fees and services.

And if you think that'll keep trending up, stay stable or go downwards going forward. But those are some of the things I would look at. I know it's not it's a lot of information all at once, but you want to get a good picture of what, you know, what the bank is, where they're doing, what their business is, where they're getting their revenue, their geography, and some of the risks going forward. And also one of the things you'll have to keep in mind is traditionally, how have they been managed? I know the Laurentian Bank of Canada, they had kind of a mortgage scandal about like loans that were provided without the proper supporting documentation. So they had to do some write-offs a couple of years ago. So that's something you'll want to

keep in mind as well. Yeah, that's a good overview. And I don't have any fiery hot takes about Canadian banks other than they're pretty solid backbones of a Canadian equity portfolio. If you want dividend income, then all the power to you. Maybe you want a large portion in banks in that case. But they're not all created equal. They kind of all decided what they want to specialize in outside of retail banking. Once the market of retail banking was kind of tapped out between the big five, they sat on the board and said, what do we pursue next? Whether it's retail banking outside of Canada, like TD has a very large retail banking presence in the US. And they have a big presence in discount brokerage services with TD Ameritrade. So there's other avenues that they decided to go search for growth. And look, if you've been a shareholder of Canadian banks as a group for the past few decades, you've done exceptional. Total return-wise, you've smashed every index you can find. So if you want to keep buying banks, that's completely fine.

What I will say is, in terms of business models, you know, if you listen to this podcast, I hate commoditized businesses. And banks are pretty close in the fact that they don't sell a commodity, but they have a macro factor of they make money from net interest income. That is the top line of a bank's income statement is net interest income. And that is the margin they're making from interest rates from lending money. And with interest rates being so low right now, completely out of their control. So there's that commoditized piece. They don't have a whole lot of pricing power and in this environment and in any environment. So it's something to consider. I mean, if you own banks and you see these low interest rates, are you panicking?

Probably not. Banks are very solid. And especially the banks in Canada, very solid. So hold on to them. But I'm not, you know, putting fresh capital into them. Yeah, one thing I did forget to mention, one thing I would strongly recommend that everyone who's looking to invest in a Canadian bank, and I don't know which one, but I know there's a couple that do have quite a bit of exposure. And that is probably a bank I would stay away from. And I'm sorry for our Alberta listeners, but it is what it is.

I mean, it's not an easy time to be an oil business. That's just the reality. And some of them are largely indebted, and they may have to file for bankruptcy. And that could have some pretty big repercussions if there's a lot of exposures to that sector. So that is one thing I wanted to mention specifically for Canadian banks. That's a good point. You're seeing Suncor laying off a few thousand employees. That news came out two days ago.

So this is the reality that we are in. So banks that are more exposed to that, I mean, CABC has always been the lowest multiple in terms of valuation of all the big banks because of their kind of sole exposure to housing and mortgages, which people, for various reasons, have not been a huge fan of them having full exposure to that. So they have varying exposure. They're not all created equal. The notion that all Canadian banks are kind of just the same. I mean, they've performed similarly, don't get me wrong,

but that notion I don't really buy into. Over the last couple of months, I mean, there's been obviously low interest rates. The thing that has been keeping banks like Royal Canada, RBC, and TD, is they're strong capital markets businesses. And BMO has a pretty good capital markets business as well. Capital markets has been crushing it during all this volatility, especially in Q1.

Q1 is like, well, we have this massive loan loss provision, so that's why you're seeing our net income like this. But look, I mean, top line was great. Capital markets was, you know, huge, huge explosive growth. And then once they realized, okay, what stimulus that net income is going to be fine because all this loan loss provisions were overextended and overimated, banks are going to be fine. So take a look into their exposure into capital markets and investment banking. I mean, RBC is kind of the leader in that and have been for a long time. So there's different segments. Like I said, they all

have a Canadian retail banking business. What else do they have? I mean, that's kind of the question when you're analyzing all of them. What else do they have and which one do I like the most? Yeah, yeah, exactly. And I mean, I think this is a good primer for Canadian banks. If people have more questions, we can always do another episode on it but those are definitely some of the questions you should be asking yourself if you don't want to dig into it then maybe look into an index that's tracking those banks and just invest in that yeah i mean if you want to buy like vcn or x i forget the i shares one is just refer to last episode of the Canadian market weighted index fund, you're going to get huge, massive exposure to banks. I mean, you're also going to get some pretty juicy exposure to the oil big companies like Suncor that's firing lots of people. But more than 25% of the holdings will be

in Canadian banks. So there's something to think about uh rbc and royal bank together are 17 percent of vcn for instance just in those two companies so there's many ways to go about this but hey pretty nice dividend yield hard to hard to like a stable growing five percent dividend yield. Really hard to dislike that. Yeah, yeah, exactly. And I mean, look, let's not, I think a lot of people take those dividends for granted. I mean, I think they're, for the most part, they're pretty safe.

But, you know, you just have to look down south to look at, and obviously there's a bunch of other issues with that one, And I won't go into detail, but Wells Fargo, right? So they had to cut their dividends. So make sure, you know, they're pretty safe overall. But, you know, don't assume that it's going to go on forever. You know, don't make that assumption. Make sure you do your research. If not, you know, do what we just said and just pick an ETF that tracks them or a low-cost index that's focused in Canada and you'll get some decent exposure in banking. Yeah. So to wrap that up, if you are Joe Schmo living in Thunder Bay or Rick from Red Deer and you've been dominating the S&P by just holding Royal Bank for over 50% of your portfolio over the last couple decades.

Hold on, man. You've been crushing the S&P and you've amassed a huge yield on cost in terms of income. So stay the course. Keep what you're doing. All right, that does it for this episode, guys. Getstockmarket.com now brings you to a free, no credit card required trial of the new Stratosphere platform. GetStockMarket.com is no longer a static screener. It is an amazing screener with a company search mechanism as well and a forum insider info. mechanism as well and a forum insider info my picks you don't even have to subscribe with a credit card to see my picks for both the u.s and canada now that's at getstockmarket.com stratosphere is live baby um simon you've tried it what do you think yeah it's uh it's really nice nice tool and uh just got the notification about your picks,

and I've been also chatting on the forums and people having questions. So, guys, if you sign up, you'll probably see and get questions. If you've got a question, go to Simon. This guy's writing essays for you. Hey, I mean, there's logic behind my reasoning. It's incredible. The value you're providing is nice. I got to step it up with my one-word answers.

I'm like, eh, don't buy it. That does it for this week, folks. Thank you for listening. This is a long episode. Holy. I'm looking at the timer. Gaming got us fired up. That does it for this episode, guys. We will see you back next week.

We're back on our weekly sketch. This podcast is now available everywhere. Go rate it. Share it with friends and fam. We had over 10,000 downloads last month. Let's get 100,000. See you guys next week. Bye-bye.

The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.