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.

Did knock-out barriers push Starbreeze shares down?

I hate to blame short-sellers or market manipulators for a stock going down. But I also have a lot of respect for option barriers. They often act as a short term magnet for prices because of the nature of option hedging.

I won't go into details but to make a long story short, an option trader does not care about the direction of a stock, the option trader makes money of the spread and hedges risk by owning the underlying instrument. But around barriers the option trader's life gets difficult because the hedge, the amount of stock needed to be correctly manage the risk (delta), is moving around like crazy (high gamma) because the barrier is a digital event. The option trader does not like this. 

In Starbreeze there are a few warrants in the market which offer a leveraged long exposure to the stock. When the bank (in this case MorganStanley) sells such a product they hedge their risk by buying Starbreeze shares. To enable leverage these warrants have a knock-out level. One of those warrants had a knock-out level at 17.46. As the share price moves towards the knock-out level gamma starts to increase, a situation the option trader normally does not like. If the option trader at any points feels certain that by dumping all of the Starbreeze shares (which are held as a hedge should the stock go up) into the market the knock-out barrier will be hit and the option will be dead, the trader will most likely go for that alternative. 

MorganStanley being a large seller today and lacking any other news around Starbreeze I am inclined to believe that this is what might have caused such a large move in the shares today.

The bad news is that there are more warrants out there with barriers at 16.37 and 15.52 so we might go even lower. 

The release date for RAID, Payday Crimewar and Walking Dead should be published any day now so getting into the stock at these levels looks attractive. But I might just wait until 15.51....

 

Starbreeze Q3 report

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.

 

Paradox and Starbreeze down on newspaper analysis

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.

Starbreeze launches Indie brand

Starbreeze announced today that they are launching a Indie brand together with Lion Game. The first game out is called AntiSphere. As far as I can see it does not look as if this deal involves the creation of new shares - sigh.

Still waiting for those AAA full priced titles to start coming to motivate the current valuation. 

Starbreeze shopping spree continues

The gaming company I love the most for its boldness, Starbreeze, continues it shopping spree as it buys Belgian Visual Effects (VFX) studio and PresenZ technology.

We have yet to see any significant bottom line impact of the recent acquisitions and although I am full of love for this company, they need to start getting back to basics and churning out full priced titles with multi-million copies sold to defend the valuation. 

Right now I feel the visibility of when the next full price title will hit Steam is low and my plan at the moment is to wait till after the Q3 report to get back in.