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.

Planet Coaster now above 400,000 sold copies & FDEV shares hit 300p

According to SteamSpy Planet Coaster has now sold in 411,000 copies, which was close to my estimate for 2016. And it is standing strong in the Steam Winter Sale, currently at number 3.  But remember, 400,000 is still about 9.6m less than the approximately 10m units sold of the RollerCoaster Tycoon series, which was developed but not distributed by Frontier. So I am expecting Planet Coaster sales to continue to grow and grow and grow...

On the back of the success of Planet Coaster, Frontier Developments shares hit 300p last week, which happened much faster than I expected. But in my view 300 is just a pit-stop before moving to 450p which is closer to a normal valuation of the company in my view.

 

GWJ Podcast talks about Planet Coaster as one of their top-10 games of 2016

One of my favorite podcast about games, Gamers With Jobs Conference Call, recently went through their top games for 2016 and Planet Coaster was discussed.

The discussion touched on the longevity and DLC-potential of the game in a very positive way.

You can listen to the whole episode here and they start talking about Planet Coaster around the 45min mark (after Doom).

I also did an audio outtake of just the talk about Planet Coaster which you can listen to here.

Steam Winter Sale starts today - will Planet Coaster go on sale?

The Steam Winter Sale starts today. 

On a business level it will be interesting to see if Planet Coaster will go on sale. That would  help the game hit 500,000 sold copies this year.

On a personal level I like to buy stocks when they are trading on a discount - similarly I like to buy games on a discount.

The last two games I bought on Steam was Elite Horizons expansion which I picked up at the last sale and Papers,Please which was recently 60% off. Both are highly recommended.

Games I am looking to pick up if a good deal emerges:

  • Virginia - Digital Bros
  • Inside - Playdead Studio
  • Superhot - Superhot Team
  • Tyranny - Paradox
  • Ori and the Blind Forest - Microsoft
     

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.

Something is boiling...

Another "big" day for Frontier Developments in terms of volume. 70,054 shares traded today.

Planet Coaster Thrillseeker Edition is number 4 on the Steam Global Top Sellers list at the moment and Planet Coaster regular edition is at number 16 - the game is officially released on Thursday.

Frontier Developments should be trading 8x 2016 Sales, which leaves a decent 150% upside from here.

Planet Coaster Watch...

While others were up watching the elections I was up counting down to Planet Coaster beta release and it is still in the top-10 Steam global best-sellers list!

Also! 56,000 shares cleared yesterday at 205 pence. 

Btw, if you are fast and can grab Starbreeze below SEK20 today, go ahead and do that!