Updated price target for The Farm 51

Although Get Even is number 6 on Gamespot's Xbox One ranking at the moment the delay of the game and the lack of social media support from Bandai has gotten me worried about the promotional push for the game.

I have actually had the pleasure to play the game as I had pre-ordered it on Playstation and it downloaded to my unit beforehand. I really enjoyed the game. All the corner-gun and phone mechanics are cool but this is at the core a story focused game told in a FPS mode. Imagine the game as the movie Inception, but instead of going into dreams you are going into memories. Memories that can change while you are in them, become bizarre, play tricks on you etc. The music was 10/10 fantastic. I recommend anybody who is going to play the game to first listen to this podcast with the game's composer about the music in the game. Although the scanned environments make the wall textures really cool and immersive, the use of the old UE3 engine is evident in that lightning and shading is not at the best. People going into this game expected an Doom style FPS or RE horror game will be let down as the game is none of that. 

Anyway, without Bandai support the game will not be able to sell as well as I had hoped. Therefor I have adjusted my model to assume only 150,000 units sold. This leaves World War 3 as the core cash-flow generating project for The Farm 51 in 2018. Hopefully we will hear more about the game in the near future and potentially a publisher deal during Q3. The game development had already gone quite far the last time I saw the game earlier this year. With GameInn grants and bond funding the company should be able to complete the game without the need of more financing. My new target price has been lowered to 18PLN after lowering my expectations for Get Even sales.

It is important to keep in mind that The Farm 51 is probably the cheapest listed game developer with a full development team and a upcoming IP in the world.

Get Even delayed due to bomb theme in game,

Given recent terrorist events Get Even is being delayed to June 23rd. The theme in the game is a girl tied to a bomb which is understandably an inappropriate theme at the moment.

It is important to point out that the game is finished and the delay is not related to development issues. This is not CI Games.

This will probably effect the share price tomorrow, although Get Even at best is 10% of the value of The Farm51. This does not in any way influence the future earnings potential of the company and the ability of the company to sign a publishing deal for World War 3 at E3 and develop Chernobyl into a full shooter.

 

The ghost of CI Games haunts The Farm51 shares

According to Steamspy Sniper Ghost Warrior 3 had a very weak launch on PC and was thus also probably weak on consoles. As CI Games crashed it reminded everybody just how risky it is to have the future success of a developer tied to a single big IP. The whole Polish gaming sector was sold off as investors were reminded that launches can fail and gaming stocks can fall.

On of the biggest sell-offs was experienced by The Farm51. And it is understandable because on the surface it might be viewed as another developer reliant on a single IP. But in reality there are stark differences.

  • The Farm51 has two promising IP:s in development, World War 3 and Chernobyl. CI Games has SGW and LOTF, non are very promising at this point.
  • The Farm51 has no big intangible assets on its balance sheet as Get Even was developed for Bandai.
  • The Farm51 is not at risk running out of cash in the short term as it has recently financed itself and has GameINN grants coming in.
  • The Farm51 has a market cap of 117mPLN compared to the current market cap of CI Games of 270mPLN or the 400mPLN it had before the launch of SGW3. So expectations are not in the same dimension.

New investment idea published - The Farm51

I have been pretty quite on the blog because I have been very focused on my next investment case, Polish game developer The Farm51. I have written a few times about it, but now I have put together a comprehensive research report similar to the report on Frontier Developments back in 2016.

In the past The Farm51 has not been a company to get overly excited about, but now the company is moving into a new dimension with the release of their next game Get Even on 26th of May. In my view, it will establish The Farm51 as a first-rate studio and thus revalue the existing product pipeline (which includes a FPS MMO called World War 3) in line with other high quality studios.

Of course, investing in a company with almost no cash-flow in the past based on the release of future games is high risk so do your research and adjust your positions size accordingly.

Disclosure: I am long The Farm51 shares.

Read the full report here.

Get Even is to The Farm51 what Brothers was to Starbreeze, a very promising starter course

On the 9th of September 2013 famous video game reviewer TotalBuiscuit reviewed Starbreeze's game Brothers calling it one of the best games he had ever played. Back than Starbreeze was still considered indy. The shares were trading at 3.50 and the market cap was about 500mSEK. 

Brothers itself went on to win a lot of awards but was never a big cash cow for Starbreeze. But what it did was that it showed that Starbreeze was a AAA-studio in disguise and over time they proved themselves to the world and are now valued at 4,4bnSEK.

Yesterday PewDiePie played The Farm51's game Get Even. He liked it. He even commented that these days it is hard to know what indy means, because Get Even might as well be a AAA-production.

If you go to a new restaurant and the bread they put on the table is just the right temperautre and is offered with a great spread - you can be pretty sure the main course is going to be amazing. Just as Brothers was a the starter course for Starbreeze, Get Even is a starter for The Farm51. It will not make them a lot of money, but it is an indication that the main course is going to be amazing. 

At the current valuation of 130mPLN (~290mSEK) the risk reward is great. In my view this is like buying Starbreeze at 3.5SEK in 2013 - and the shares are now at 16SEK.

Once Bandai Namco rolls out the hype train in April for Get Even I belive The Farm51 train will also leave the station heading towards 50PLN.

Thanks PewDiePie – The Farm51 just became even more undervalued

On Friday my view was that The Farm51 was undervalued. Thanks to PewDiePie playing Get Even this weekend, it is now even more undervalued.

The largest holding in my portfolio at the moment is The Farm51. The reason is because I think it offers the best risk/reward of any gaming stock in the world at the moment.

My first of many trades in The Farm51

My first of many trades in The Farm51

My target price for The Farm51 has been 27pln. One basis for that target price was that Get Even would sell 1m copies and thus revalue the product pipeline of The Farm51.

Now that PewDiePie showcased Get Even I believe the game could sell 2m or more. The Farm51 only keeps 20% of sales of Get Even, so the impact is not as much in direct sales, as it is in revaluing its product pipeline to be in line with other AA-studios.

The Farm51 will have very successful FPS/puzzle game (Get Even) out in May (although Bandai has the IP). They are planning to launch a MMO in 2018, and already have another FPS in development for 2019 as well as right of first refusal on Get Even sequels. The market cap of The Farm51 should therefor at least be in line with Funcom, which is valued at 370mPLN compared to 131mPLN for The Farm51 (as per Friday close on a fully diluted basis).

That makes The Farm51 probably the only game studio where I see >100% upside in the share price at a low risk.

I will publish my full analysis The Farm51 in the research section in the coming days.

The resurgence of publishers?

The trendy thing in the last few years has been to move to self-publishing. Many have done it successfully. The success of Steam was initially a blessing for self-publishing. But with the exponential growth in games published, it is becoming ever harder to shine through. In 2012 379 games were released on Steam. In 2016, that number has increased to 4207.

Maybe events like flying a dozen journalist to norther Sweden drive cars in the snow and play video games like Bandai Namco, or offer tasty macarons in Paris and the possibility to meet all your developers like Focus Home, will become more important as the avalanche of new games becomes ever deafening. 

Focus Home Interactive event in Paris

Focus Home Interactive event in Paris

On console it might be even more important to have a big publisher that can get you displayed up-front on the stores. 

I recently looked browsed to pre-orders on my PS4 and the games that were displayed were from Square Enix, Bandai Namco, EA, Activision and 1 indy title. Maybe a coincidence, but it seems to me it sure helps to have a big name publisher when you want to reach console gamers.

 

Shares of Funcom probably close to fair value

Recap

On the 9th of January I wrote a blog post "Funcom: Conan Exiles looks exciting but success is already priced in". After that the shares rallied more than 100% and than fell back about 40% to about 30% higher than back in January. So I was clearly wrong about staying out of the stock on an absolute basis. I can only congratulate everybody who did not listen to me.

Funcom has proven itself

I think Funcom has proven itself both as a studio being able to deliver a big title and being able to publish it. Conan Exiles has been talked about all around the gaming community. Funcom has set the fundamentals to become a great studio. 

Looking ahead

The company has sold about 450,000 units of Conan Exiles according to SteamSpy. With some discount they can probably push that toward 650,000 (not all at full price) and let's assume they sell similar amount for XBOX already 2017. That would imply about $22m in net revenue. They might be able to generate another $4m on back-catalogue. Assuming a running costs of the business of about $7m (100 employees + bells and whistles) that would imply an EBITDA of $19m and an EPS around $0.075 or 0.63NOK (no tax as the company has a $22m tax loss carry forward).

Valuation

Unfortunately, to my knowledge the company has no new IP in the pipeline for 2018 and I find it hard to assume anything else than break-even, probably loss making, for the 2018 and 2019. As such a PE multiple of 6x for 2017 is reasonable in my view and as such a price target for me is 3.8NOK. Of course that could change drastically if they releases some kind of successful lasting monetization strategy or new IP which could create similar revenue in 2018 & 2019.

I like to have at least 50% upside to cover all the assumptions that might be wrong so the share price would need to come down towards 2.5NOK for me to get excited. Of course I realize I might be missing out on a huge opportunity. But I think at the price there is better risk reward out there, for example The Farm51, Frontier Developments or even Paradox.

Am I missing something? Am I wrong? Please help me out in the comments!

 

Impressive accuracy of SteamSpy polling algo

I was already impressed by the accuracy of the SteamSpy polling algo when it was right on the ball regarding sales for Planet Coaster. I just noted that Paradox just released sales numbers for Hearts of Iron IV:

"Paradox Development Studio is thrilled to announce that Hearts of Iron IV, its World War II themed strategy wargame, has sold 500,000 copies worldwide since its release in June 2016."

SteamSpy reports 498,696 owners of Hearts of Iron IV. 

I highly recommend anyone using SteamSpy for any professional or investment purpose to read about their methodology here.

 

 

 

Valuation: THQ Nordic vs. Frontier Developments (50% discount for the similar profile)

THQ Nordic reported FY2016 earnings this morning.

They are similar in size and growth to Frontier so I like to compare them.

For THQ I will be using FY2016 and for Frontier I will use TTM per H1 2017 as the two companies have different financial years. But this way I will cover roughly the same calendar period.

I will translate Frontier numbers to SEK at GBPSEK 11.00

Revenue

  • THQ 302 mSEK
  • FDEV 317 mSEK

Revenue growth YoY

  • THQ +42%
  • FDEV +66%

EBITDA

  • THQ 132 mSEK
  • FDEV 94 mSEK

Net profit

  • THQ 71,9 mSEK
  • FDEV 50,6 mSEK

Market Cap

  • THQ 2,225 mSEK
  • FDEV 1,055 mSEK

Do I need to say which one I would rather own?

Focus Home Interactive FY2016 trading update

Turnover of € 75.5 million for its 2016 financial year which equals P/S of 1.8x
Turnover of + 9% compared to the financial year 2015.

The last quarter of financial 2016 was their best quarter ever. Sales more than doubled (vs Q4 2015) to € 39.2 million. This performance is explained by the excellent sales of Farming Simulator 17 released on the 25th of October. Farming Simulator will be coming to Nintendo Switch and 3DS.

Upcoming releases for Focus include: 

  • The Surge
  • Vampyr
  • Styx: Shards of Darkness
  • Call of Cthulhu
  • Shiness, Blood Bowl 2
  • Space Hulk Enhanced Edition on consoles
  • A Plague Tale
  • GreedFall
  • Werewolf: The Apocalypse
  • Insurgency

If they maintain a 10% net profit margin the company is around P/E 18. For a full year growth of 9% that seems about right, but if the last quarter is indicative of their future than its cheap of course.

Frontier Developments' profits explode (AIM: FDEV). Reports +179% YoY EBITDA growth and +791% EPS Growth

Although the revenue for Frontier Developments H1 2017 earnings was already known the company surprised on the upside with strong profit growth.

  • EBITDA grew 179%
  • EPS was 10.7p compared to 1.2p for H1 2016
  • TTM EPS is 13.7p which puts the company at P/E 21. Very cheap in my world given the growth.

It is very encouraging that the company is beefing up its staffing to meet the demands of a growing listed company by adding Charles Cotton, with a track record of successfully scaling organisations listed on both LSE and NASDAQ, to the board and the appointment of Alex Bevis as CFO, who is currently CFO of a LSE company.

Looking ahead I am very excited for the PS4 launch of Elite. It will mark the debut for the company’s proprietary COBRA game development technology on Playstation 4. And of course it will be very exciting to find out what movie IP the company has licensed.

Frontier Developments announces third franchise to be a major Hollywood IP

Frontier announced this morning that their third franchise will be a Hollywood IP. 

Frontier mentions that they expect to earn money from the IP already in 2018, so it must have been in development already - further strengthening my belief that they are re-using knowledge and expertise gained during the development of The Outsider.

I cannot imagine any game based on a Hollywood IP no being a console title, which is great from a financial perspective and strengthens the case for further upside in the shares.

EA fiscal Q3 earnings released

In the last update EA gave full year revenue guidance of 4,775mUSD which they have now adjusted to 4,800mUSD. That would equal a P/S 5.3x and a growth of 9% on a full-year basis. The biggest growth was in digital full game downloads which grew 50% YoY and 27% on a TTM basis.
Interestingly PC sales declined by 14% while both console and mobile sales grew 15% on a TTM basis.

EA commented that this was the first quarter ever that EA generated $1 billion in operating cash flow. They also pointed out that FIFA 17 was the best-selling console title in the world in 2016 and that Battlefield 1 was the biggest Battlefield launch ever and has a player base more than 50% larger than that of Battlefield 4 in its comparable launch quarter.

Shares of EA where slightly down in after-hours trading.

 

Dead By Daylight coming to console - could sell another 5 million copies.

Starbreeze and Behaviour Digital brings asymmetrical horror game Dead by Daylight to consoles in 2017.

Dead by Daylight has already sold more than 1.8 million copies on Steam. Many cross-platform shooters sell 3x more on console than PC. So Dead by Daylight could sell another 5 million copies if all goes well.

2017 will be a year of many news releases for Starbreeze. This is a great start. Given the recent wash out in the shares, this is a great opportunity to get in. I am buying.

Conan Exiles launches on Steam

Conan Exilies from Funcom launched today in early access on Steam. The game instantly hit number 1 ahead of Resident Evil 7. At 730mNOK market cap the game needs to stay in the top for at least a few weeks. Too early to make any other conclusions yet.