Black Friday deals in gaming stocks

Here are the major gaming stocks listed by some rough estimated current P/S ratios:

  • Starbreeze 11x
  • THQ Nordic 8.6x
  • Paradox 8.5x
  • CD Projekt Red 8x
  • ActivisionBlizzard(King) 5.9x
  • Electronic Arts 5.4x
  • Take-Two Interactive 2.9x
  • Frontier Developments 3.2x
  • Ubisoft 2.2x

I am not saying the ones in the top are expensive. They most certainly have reason for their high valuation. But if you are looking for a deal – look at the bottom.

Ubisoft is not my favorite because of the dismal news around the Watch_Dogs 2 launch.

But Frontier Developments just launched Planet Coaster which has been the number 1 game on Steam since its launch on the 17th if we exclude for discounted games. And Planet Coaster sales are not even included in the P/S estimate above as they are based on FY 2016 – i.e. only Elite Dangerous & Elite DLC sales.

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!

Will Star Citizen hurt Elite Dangerous?

My favorite game right now is Elite Dangerous. I love watching videos of Planet Coaster. I think David Braben is a genius. Frontier Developments is trading at an EBITDA multiple of 13.8x with Planet Coaster out in about two weeks. It is my favorite gaming company to be invested in.

BUT

Star Citizen. 

Cloud Imperium Games has raised over $100 million to develop the game, which is more than the market cap of Frontier. I just read that there were 7 full time artist involved in designing the interior of one of its latest (and largest) ships. The videos I have seen look absolutely incredible. Will Star Citizen eventually draw away players from Elite or will it just strengthen the genre and actually be positive for Elite in the same way many different FPS game can co-exist. Or maybe we end up in a FIFA / PES situation were both titles can thrive in a duopoly.