Frontier Developments, The revaluation journey has begun. +50% upside.

UPDATE JANUARY 2017
The stock reached my short term target price target of 300p late 2016 as Planet Coaster sales reached the anticipated 500,000 sold units at full price, of which 400,000 were sold in the first month of release. My base case revenue estimates for FY 2017 was £28m. The company recently commented in an interview that they are comfortable with full year revenue expectations of £32m which is in line with the trading update for H1 2017 where they indicated revenue of £18.1m, a 66% YoY growth. I was also very happy to see the genius introduction of aliens into Elite Dangerous which generated articles in Forbes, BBC, PC Gamer, many Youtube videos and entered many gaming podcast discussions. It boosted the Steam concurrent players number for the game by 20%.

INVESTMENT CASE UPDATE
2017 announcement of third game franchise not priced into the stock: Mid-2016 the company was valued based on 1 successful franchise. Since than it has been revalued to include the success of Planet Coaster, the second franchise. At £100m we believe the company is fairly valued as a 2 franchise game developer. But the company has confirmed both in earlier presentations and in the latest trading update that a third franchise will be announced, probably in the first half of 2017. In the trading update they hinted that the third franchise is already in development - “the Company has continued to increase its investment in development and other business activities.” We expect this third franchise to at least have the same potential as Planet Coaster, but there is good reason to believe that it will be a cross-platform mass appeal title with the potential to outsell Planet Coaster several times. Looking at peers the announcement of a promising future AAA-title alone should add about £50m to the valuation - for example Funcom is valued at about £90m based mostly on good looking trailers for their soon to be released early access game Conan Exiles.

REVALUATION TRIGGERS AHEAD

Announced
• ‘The Commanders’ multi-crew expansion for Elite Dangerous
• Playstation launch of Elite Dangerous in Q2 2017
• Planet Coaster DLC’s announced in the H1 2017 trading update (“We have a strong programme of updates in place for Planet Coaster which will be released through 2017 and beyond”)
• Reveal of third franchise (“We are now working to further the success of our existing franchises and create additional ones.”)
• CFO begins in April 2017

Speculative
• A version of Planet Coaster for console or mobile
• Playstation VR support for Elite Dangerous
• Elite Dangerous first person expansion already in 2017

Read the full write-up here.

Increase in Elite Dangerous players after alien encounter news

Frontier Developments' insertion of aliens into Elite Dangerous sparked news coverage from PC Gamer to the BBC and also peaked the interest in the game which saw an increase in players as seen on the Steam Players stats which can be viewed at SteamDB.

It also promted this lovely describtion in Forbes:

Elite Dangerous, otherwise known as the No Man’s Sky that’s actually good, or the Star Citizen that’s actually out, is making headlines for a rather cool reason as of last night.

From a PR perspective it was a perfectly executed action to increase interest in the game and at the same time add content into the Elite universe.

 

Elite: Dangerous coming to PlayStation in Q2 2017

Frontier Development (AIM:FDEV) shares just got cheaper. 

See the announcement trailer here: https://youtu.be/YESNObZJTgQ

Frontier announced that Elite is coming to PlayStation in Q2 2017. 

If its launched before the end of May some of the sales will end up in the company's FY 2017 earnings (financial year ends May). Together with Planet Coaster the company will probably have a monster 2017 in terms of earnings.

Arbitrage in Frontier Developments?

If you wish you had bought Starbreeze at SEK2.0 based on the fact that Payday2 was performing very well on Steam, this is the chance to redeem yourself.

Frontier Development has one franchise today (Elite Dangerous) with a hardcore player base generating about £20m. in revenue per year for the company.

They have now launched a second franchise which is performing very good on Steam. 

I cannot make any other conclusion than that Planet Coaster is a new franchise for Frontier that will generate at least £10m in yearly revenue going forward. The company has no debt and cash on hand.

That will put the company on the trajectory of 50% growth next year and give it the possibility to launch its third franchise, which they have mentioned to be a work in progress. I can see no other way than that this should give it a valuation slightly below Starbreeze and Paradox of 6-8x sales. That is equal to a share price of about 600p - an upside of 200%. The main reason this arbitrage exists in my view is that the stock is listed on AIM, which is a very difficult market to trade and many institutions outside of the UK are probably not even allowed to own AIM-listed companies as AIM is defined as an unregulated exchange.

With such a potential it is difficult for me to motivate a serious investments in any other gaming company at the moment.

The one risk I see is that the Elite Dangerous franchise will completely die once Star Citizen and some of the other AAA-quality open space games are launched in the near future.