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!

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.

Funcom: Conan Exiles looks exciting but success is already priced in

Oslo listed games developer Funcom, owner of Conan The Barbarian IP-rights, is developing an open-word sandbox survival style game based on the Conan universe called Conan Exiles to be released for early access at the end of January. Shares have recently taken off after the company showcased new content from the game. The games is being released on both PC and Xbox.

The company's market cap is currently at around $70m. 

The company earned ~$8m in revenue TTM per Q3 2016 from its other games such as The Secret World, Age of Conan and Anarchy Online. At that run-rate it looks like the company is operational break-even for those products.

Conan Exiles looks very exciting and will probably sell very well given how other similar open-world sandbox survival games have done. I listened to the Xbox One Party Chat podcast with Joel Bylos from Funcom discussing the game and everything I heard sounded just amazing. But at the current share price success is already priced in in my view.

According to my calculations modeled on 5 million sold copies of Conan Exiles over 5 years followed by another game release with the same success I get a fair value of about NOK2.5-2.8 per share.  And even in such an optimistic scenario Funcom would still be valued higher than Frontier Developments at the current share price. That is not attractive enough for me.

I have no doubt that exuberance can push Funcom shares higher though.

Am I missing something? I am more than happy to be corrected as I will probably buy Conan Exiles because the game looks great and I like to own developers of games that I play.