Record quarter

I am impressed with the quarter. In terms of earnings it is their strongest quarter ever, SEK103m, even stronger than when Payday2 was at its peak. Although SEK32m is a prepayment from Digital Bros for RAID: World War II (for the retail distribution rights).

RAID could generate SEK1bn in sales

Digital Bros are smart guys and I must think they expect to sell for about SEK200m in retail. Given that physical sales are about 20% of digital sales, that implies that RAID will sell for close to SEK1bn (which equals about 2-3 million players). Using P/S multiple of EA/ATVI of about 5x, that means that Starbreeze's valuation today can be motivated by RAID alone (if it's a full priced game and all goes as planed...).

Geminose is no longer

The sad side of the report was that they seem to be scrapping the toys-to-life concept within Geminose, saying that they will remake the game to be a digital only product. They don't give any guidance on when this will be completed but Geminose without a physical product sounds like a completely different and a lot less exciting story.

When will The Walking Dead come alive?

Regarding the much anticipated OVERKILL’s The Walking Dead (which will hopefully be released as long as people still remember the television series) they say that it "is taking shape" and that "the general concept is locked and we’re working diligently to iron out gameplay mechanics, level designs and systems." That sounds like a H2 2017 release.

The other projects like IMAX VR, John Wick and Antisphere seem to be cool projects but I am not sure how much they will add to the bottom line in the short term.

Elementerra, Storm, Crossfire and The Hunt are all in pre-production, which means release earliest 2018 I guess, but its a great pipeline.

Change of listing

The company has engaged an investment bank to re-list their shares from First North (which is an unregulated exchange) to the main exchange. Looking at the current list of institutional shareholders of Starbreeze it does not look like people have been restricted to buy the shares on the current listing, so I don't think it will matter much. The stock is already included in the MSCI Global Small Cap index.

To sum up:

Downside surprise if RAID does not sell well, i.e. less than 1 million digital copies over 1-2 years. But given the past success of Starbreeze and the vote of confidence from Digital Bros I think it will be fine. Buyers beware though! Based on the last quarter, which was a record quarter, the company is trading at 14x annualized P/S which is by far the highest I have seen in the sector, so 2017 really needs to have some banging releases.
Upside surprise if The Walking Dead comes out during 2017 and sells >1 million. Than we are talking a stock price above SEK40.
I am not expecting Antisphere, Payday Crimewar, John Wick Chronicles or IMAX VR to make any significant impact on bottom line, but they are some nice branding tools and I view them mostly as some upside options which might turn into cash-cows.

I would probably own Starbreeze stock here if it was not for the even better risk-reward opportunity in Frontier Development.