Schaeffer's Outside the Box Blog
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Having only just started working at Schaeffer's Research, I'm new to covering the stock market. However, one thing I am familiar with is video games. I'm certainly not as diehard as many other gamers out there, but I play enough to annoy my girlfriend. Given my passion for gaming, I wanted to take a quick look at one of this week's biggest stories: the Amazon.com, Inc. (NASDAQ:AMZN) purchase of Twitch.

Investing is a serious activity. When it comes to money, people don't like to play around. They're in the market to invest in serious businesses, for serious returns. But many investors might be surprised to find that serious money can be made by betting on video games.

With its acquisition of Twitch, a platform that allows users to stream themselves playing their favorite video games to the Internet, Amazon shares increased 2.3% on Tuesday. While many traders may be unsure of how Twitch works, and unfamiliar with the gamer community in general, it's obvious that some were quick to recognize the potential significance of the deal.

By purchasing Twitch, AMZN has obtained a young media company in a burgeoning market. In fact, Twitch's rise to popularity is astounding. According to The New York Times, "Twitch did not exist a little over three years ago, and it now has 55 million unique viewers a month globally."

Twitch did that on its own. And now it has Amazon to help it grow even more.

As far as the market for video games goes, it only makes sense that as millennials get older, a greater percentage of the population will be playing games, in one way or another. And with Twitch, it doesn't matter what device is being used; there is no Playstation versus Xbox battle here. Twitch is for all gamers.

There's enormous potential in video game broadcasting, some of which has already come to fruition, with people like Felix Kjellberg making a killing on YouTube. Both Microsoft Corporation's (NASDAQ:MSFT) Xbox and Sony Corp's (ADR) (NYSE:SNY) PlayStation have made a point to make broadcasting gameplay easier for players. That they took the time to address this idea tells you that both companies believe broadcasting gameplay is a growing trend.

For growth, Amazon would like to see video game spectating have a ripple effect, where viewers will be motivated to improve their video game skills to become as good as the player they are watching, and then begin playing on Twitch themselves. Think of this as a kid watching his favorite athlete on TV.

But how much are people watching? There are already crazy numbers on how long people stay on Twitch, and if anyone can sit and look at a screen for extended periods of time, it's a gamer. Plus, this may be a new trend in reality entertainment; if the Kardashians can become the most popular family in the U.S., I firmly believe people can watch just about anything.

The most intriguing aspect of all this, to me, is not that Twitch brings in so many viewers, but how passionate and involved those viewers are. Read this story about a father-and-son team on Twitch who almost had to quit streaming their gaming until their fans all pitched in and gave them the funds they needed. If you want to talk about a community, Twitch is the epitome of that.

However, there's competition out there. Ustream is a similar service that allows users to stream live footage to the Internet via an app. And of course there's YouTube, which Google Inc (NASDAQ:GOOGL) has only just begun monetizing. One of these companies could come out with more enticing features, stealing players and viewers from Twitch. Remember, this is only the beginning of video game broadcasting. Many changes are sure to come. Just because Twitch is the industry leader now, does not guarantee its seat at the head of the table in, say, five years. Maybe Twitch will turn out to only be a short-term craze. Amazon will need to mold the business model properly, promote Twitch in the right ways, and beat its competitors to the punch. It'll be no simple task.

On the charts, the shares of AMZN extended yesterday's rally, up 0.39% at $343.18, despite reports of lackluster Fire Phone sales. From a contrarian standpoint, more upside could be in store, should option bears hit the exits. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 1.01 registers in the 94th percentile of its annual range. In other words, option players have picked up AMZN puts over calls at a much faster-than-usual clip during the past 10 weeks.


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Stocks quoted in this article:

Yesterday we learned that we are best advised not to tinker too much with our exchange-traded fund (ETF) positions. Today's "lesson?" Maybe we should ignore news altogether.

Chuck Jaffe on MarketWatch took on an interesting project in July. He took a snapshot of the MarketWatch front page at 5 p.m. each day. And here are some of the headers he found.

  • 'This is not an average, typical or normal bull market' [expert] says

  • Today's bubbles aren't like the famous bubbles of the past

  • If ever the stock market flashed a 'sell' signal, it's now

  • 'Rotten rotation' could signal bull market is living on borrowed time

  • [Expert]: U.S. stocks will be 'very disappointing' for 10 years

  • A stock correction is coming, then more years of gains; [expert]

  • [Expert] There's a big hole in the bull case for stocks

  • We're in the third biggest stock bubble in U.S. history

  • Not much fallout from Gaza, Ukraine? Wait a year, says [expert]

OK, those are some of the bearish ones. What about the flip side? Well…

I would have included something from an expert suggesting a big gain ahead, but there weren't any of those atop the pages I looked at (they could have been there at other times of day).

Well, if everyone's bearish, time to get bullish, right?

If only the markets were that easy.

I think, in reality, it's just the nature of the current media backdrop. The bear case is almost always intellectually more appealing. Saying stocks are going to continue to slowly grind higher sounds about as boring as … well … watching stocks slowly grind higher. Making a case for something different just plays better, and kind of puts a value-add to your opinion. I mean, who's paying to hear someone say "same old, same old?"

And calling a top and a trend change? Yowza -- if you time it right, you'll have instant financial TV and Twittersphere fame.

Speaking of Twitter, for whatever reason, it's a medium that's tended to attract more perma-bear (or, really, perma-skeptic) sorts than anything else. "Zero Hedge" is probably the most "famous," but there are plenty of others. And before Twitter, it was the financial blogs that tended to lean that way.

And don't forget, MarketWatch itself is looking for eyeballs. Bearishness just plays better.

I tend to view all this stuff in a contra lens. So, yes, hearing "everyone" is bearish would make me bullish. I just value indicators more if they are backed by actual numbers. Several of the people quoted above may read bearish, but in reality, they're not necessarily reallocating their money in any way. If they're all buying puts or CBOE Volatility Index (VIX) futures, then yes, I'd view that in a contra lens. Otherwise, I think it's more just the nature of beast.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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