An analysis in Swedish financial daily DI put out a sell recommendation on Starbreeze and Paradox interactive.
I have not yet the article but I see where the tide is going so I am going to sell the few Paradox I know here at a loss - the reason is as mentioned before, Paradox have a very high bar for next years earnings to motivate the current high valuation, and Tyranny is tapering off in sales on the Steam Top List - although I know a lot of people are buying it over GOG.
As I wrote last week, I was expecting that Paradox might be down after their quarterly earnings release as the large amount of retail investors in this stock don't understand the cyclicality of the sales. As such I only opened half a position based on the bullish sales trend of Tyranny last week.
Sales January - September 2016 ended up at SEK455m. That is SEK606m annualized (better than FY2015) and thus puts P/S at 9, which is very high for the sector. Tyranny, which has been in the Steam Top-1 global best sellers list since November 8, is not included in these numbers so I think FY2016 might improve a bit, thus getting P/S to a lower and more comfortable level.
But I am cautious because the first 9 months of 2016 did include Stellaris and Hears of Iron IV. Simplistically, to grow even further in 2017 (which they have to at this valuation) they need to somehow have 2 full priced releases which outsell those two games.
Sales were 5% lower for 9 months, but profits margins increase from 41% to 49% as more games were developed in-house. Profit after tax for the 9 months was SEK172m (an increase of 12%). Profit per share was 1.63, which annualized is 2.17, putting PE at 23 - which is definitely not cheap, but worth a small position given the current sales trends of their games.
Given that Paradox overall is still quite expensive it will remain the smallest position overall in my portfolio for now.
People seem upset about Tyranny, but it is still on the Steam best sellers list.
No I am not talking about the US election ....
The pre-sales of the game are going amazing judging by their Steam position. Paradox has such an amazing fan base for their games. I thought the company came in a bit to expensive in the IPO. I still find it a bit on the expensive side, but looking at the pre-sales of Tyranny you have to think that Paradox can grow revenues aggressively in Q4 2016 and 2017 so a P/S in the high 5-6 range is probably motivated.
I like to look for 30-50% return potential, here I think its a bit lower. But I just cannot stand besides looking at Tyranny sales and not have a small position. Although I am worried that the Q3 results next week will be on the week side, and all the retail investors in this stock without a proper understanding of the business model will read that as negative and hit the panic sell button. So am buying 50% of my position now and will wait and see what happens next week.