In this first post about the creation of an index with a valuation system for SMEs in the gaming sector.
In this first part, the goal is to understand the market momentum of the sector applied to SMEs in Europe that are not listed, but are growing and self-sustainable (they are financed by what they sell to their customers). They are neither start-ups nor large conglomerates.
The initial goal is to structure the industry in 3 sections:
1/ Market Momentum
2/ Investor valuation
3/ Industry peer performance
# Market Momentum
Momentum is the strength of this type of companies in the market, when the momentum is positive it means that they have strength, sales, results… and the perception of the investors is like this. When it is negative, it means that the results are getting worse and the perception of investors also perceives it as such.
When it is close to zero it is that a catalyst is needed to see where the industry is going; usually times of uncertainty or lack of interest from customers and investors.
A key to momentum is that when it takes on a direction it is much more probable that the direction will persist than the opposite. If momentum is positive it is expected to remain so.
/ Why is it important to know the momentum of an industry in the SME sector?
To know if it is a good moment to invest in a company, or to start a new business related to it, a spinoff, a side-project, a strategic alliance. For strategic decisions of any stackeholder of the company.
/ Why create a momentum index for gaming SMEs?
Because there is no transparent and reliable information on the subject.
In the unlisted world, venture capitalists are the ones who have the control, but it is very biased and opaque information and, fundamentally, to offer guidance to the owners and managers of SMEs operating in this industry, who in no case have this information (beyond the business itself).
/ Gaming SMEs market momentum
This is the graph up to 31 August 2023:
Above zero the momentum is positive: the market for this industry was pulling and the results of the companies within it were good.
Below zero the opposite.
We are now at a point where there is no momentum; uncertainty, standstill.
Another way to see this graph, in a visual and orderly way, is a matrix where you can see how the momentum is at the close of each month.
In green the months with more positive momentum and in red with more negative momentum. In white the months with momentum close to zero.
The momentum of the SME gaming industry in Europe was very positive throughout 2020 (totally conditioned by the pandemic) and the first half of 2021. From the third quarter of 2021 onwards the momentum has been negative, with 2022 being a negative year.
I think it has a powerful visual power to see at a glance how the sector is doing and where we are coming from.
# Investor perception
This is an index like the stock market index. But with certain particularities. The main one is that it is equally weighted for all stocks.
It is based on SMEs listed in Europe for the gaming industry; companies with a market capitalisation of less than 50 million euros (nanocaps).
At a glance, we see the big picture, how investors' perceptions of these companies are evolving and where we stand. The important thing is that it gives us a perspective.
With these two elements we answer two important questions for my SME: what is the current state of the industry where I operate for companies of my size and how investors perceive it.
# Difficulties that I have encountered
In compiling this information, I have had to make decisions because I have encountered several problems.
The first is the information on listed companies.
As they are listed on different stock exchanges (in different countries), I found that in some countries they were listed and in others, they were not (due to national holidays, for example) and I had to reconstruct the gaps by hand.
As it was daily data, I had to do it all by hand, day by day for each security.
The second big problem in this phase has been the equiponderarían of the index from which the previous tables start. This has been more difficult because when you make a decision you leave out information that could be useful or you can bias the indices to one side or the other and lose objectivity.
At the beginning the index was very positive, however, most of the stocks, since the beginning of the study (07/2018) have a negative accumulated profitability, so there was a situation that did not make sense.
This is due to the fact that the equiponderation was rebalanced once a month, and as they were stocks with little movement, those few stocks that did move were the ones that were doing well and in 30 days could have almost all the weight of the index, which completely distorted the index in favour of the few companies that did have very good results and interest from investors.
The solution to this was to rebalance on a daily basis so that this distortion no longer took place.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.