Shares in CD Projekt Red continued to new highs after it was announced that GWENT: The Witcher Card Game soundtrack has been made available on Spotify, Apple Music, Google Play Music. We can only assume the full launch of GWENT is just around the corner.
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:
I would probably own Starbreeze stock here if it was not for the even better risk-reward opportunity in Frontier Development.
During the latest quarterly investor call EA CEO Andrew Wilson responded to criticism of releasing Titanfall 2 and Battlefield 1 so close to each other by saying that Titanfall 2 and Battlefield 1 caters to the different types of shooter players, giving EA broad coverage of the genre.
Given that statement it is interesting to see that EA is now offering Titanfall 2 + Battlefield 1 as a black Friday 40% off deluxe special on Origin.
The CFO of CI Games, Mr. Adam Pieniacki, bought 15,000 shares on November 18th.
CD Projekt Red rose 7.6% in trading today to PLN43.22. I was not able to find any specific news behind the rally.
THQ Nordic started trading at SEK27 per share today, up SEK7 (35%) from the IPO subscription price. But it was not possible to get a big allocation as a retail investor as the IPO was 19x oversubscribed, I got 92 shares.
At SEK27/share the market-cap of the company is SEK1.94bn, which gives a P/S (based on the last 9 month annualized) of 8.4x. Given that they have 3 full-priced games in the pipeline continued YoY growth of 50% is possible which would motivate such a valuation, but from a risk-reward standpoint I'd rather own Frontier Developments at P/S 3x or even Take-Two Interactive also about 3x.
As seen on the Steam top sellers list Ubisoft's Watch Dogs 2 has not been a raving success as of yet on PC, and other numbers have also indicated slow sales.
This prompted Ubisoft to issue a statement on the matter according to Eurogamer.
Let's hope for better sales of Ubisoft's Steep which is now in Open Beta.
Ubisoft still looks cheap at P/S 2.3x given that they continue to move sales from retail to digital.
As I wrote last week I was betting that the IPO of THQ Nordic was going to be 9x oversubscribed. Make that 19x according to this article.
I received a ridiculous 92 shares, only a fraction of what I had subscribed for. The shares need to jump a lot on the first day of trading just to pay the minimum commission its going to cost me to get rid of them as I think there are better opportunities out there.
As mentioned earlier CI Games is issuing new equity to raise cash for the marketing of Sniper Ghost Warrior 3. The issues equals a dilution of about 8% and was done at PLN22.7 which triggered a fall in share price from PLN28 to PLN24.
Today was the last day to sign up for the THQ Nordic IPO. I did sign up for all my avaliable cash but I am not holding my breath to get any decent size. About half the offering was already underwritten by institutions.
I am guessing 9x oversubscribed.
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.
Ubisoft employees accused of insider trading. Employees are accused of selling stock in 2013 ahead of news that Watchdogs and The Crew were being delayed which resulted in the stock dropping 25%.
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.
CI Games reported revenue of PLN6.2m in Q3, compared to PLN4.1m the previous year.
I was not expected any growth in revenues as the only reason I own the company is the release of Sniper Ghost Warrior 3 in April next year. So I am actually impressed by them growing revenues without any major titles out.
But the company is issuing 1.1m new shares (7,9% dilution) to be used for the purpose of marketing Sniper Ghost Warrior 3. This explains why the stock is down about 7% today. All information was in Polish so I am relying on google translate here, but my understanding is that the exact details of the issuance will be released tomorrow.
CI Games and Paradox are each about 10% of my portfolio at the moment while the remaining 80% is Frontier Developments.
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.
As I wrote last week, I was expecting that Paradox might be down after their quarterly earnings release as the large amount of retail investors in this stock don't understand the cyclicality of the sales. As such I only opened half a position based on the bullish sales trend of Tyranny last week.
Sales January - September 2016 ended up at SEK455m. That is SEK606m annualized (better than FY2015) and thus puts P/S at 9, which is very high for the sector. Tyranny, which has been in the Steam Top-1 global best sellers list since November 8, is not included in these numbers so I think FY2016 might improve a bit, thus getting P/S to a lower and more comfortable level.
But I am cautious because the first 9 months of 2016 did include Stellaris and Hears of Iron IV. Simplistically, to grow even further in 2017 (which they have to at this valuation) they need to somehow have 2 full priced releases which outsell those two games.
Sales were 5% lower for 9 months, but profits margins increase from 41% to 49% as more games were developed in-house. Profit after tax for the 9 months was SEK172m (an increase of 12%). Profit per share was 1.63, which annualized is 2.17, putting PE at 23 - which is definitely not cheap, but worth a small position given the current sales trends of their games.
Given that Paradox overall is still quite expensive it will remain the smallest position overall in my portfolio for now.
Today I signed up for the THQ Nordic IPO with the aim of selling them if the stock is up more than 15% on the first days of trading. Retail investors will probably only get a few shares given the small size of the offering which is partly already subscribed to by institutional investors.
Diversified with potential
This is not a single AAA franchise dependent company, which is very positive. They have 75 brands and about 200 games in their portfolio. The game that generated most revenue in 2015 was MX vs ATV.
In 2015 still 52% of distribution was physical, but as we have seen with all game-developers, this is rapidly shrinking in favor of digital and at the same time increasing margins.
They have some titles with AAA potential in their pipeline such as Elex and Spellforce. Also in the IPO prospectus they hint that they have 2 undisclosed full priced ($59,99) titles in development. If any one of those become a success like Payday it will easily add a few SEK billions to market cap, but I view that more as a bonus.
Numbers
The IPO is priced at SEK20 per share, and the company will have 72m shares after the offering (I am counting on the over-allotment option of 2m to be fully used) -> That gives a valuation of SEK1,44bn (CD Projekt Red SEK8,5bn, Starbreeze SEK5,7bn, Paradox SEK5,2bn, Frontier Developments SEK0,8bn, Stillfront SEK0,3bn).
For first 9 months 2016 they had revenues of SEK174m compared with 115 in 2015. Growth of 50% not dependent on the success of a single AAA release. That puts FY annualized earnings at SEK232m. So P/S is 6.2, which is quite high - that is also the reason I am more looking to flip these shares rather than holding on to them. For comparison, EA and ATVI have P/S 4.5-5.0 for the current year, FDEV only 3.2 for last years earnings (that is why this is my biggest position right now) and Ubisoft and Take-Two are below 2. On the other hand CD Projekt Red is at P/S 6.8 looking at last 9 months annualized (although they are launching GWENT as we speak and have Cyperpunk 2077 in the pipeline) and Starbreeze is about 10x annualized sales of its best quarter ever. So P/S at 6.2 is not a big problem, the issues is if THQ jumps 15% in the first day of trading, than we are around 7x Sales. That is why I would look to sell on a IPO-jump with the aim to buy back lower, just like with Paradox and Stillfront.
Worth mentioning is that Paradox IPO'd at 33 a share, which was a valuation of SEK3,5bn which equaled a P/S of 5,8x (2015).
Looking at net income for 9 months was SEK34m compared to SEK24m. That puts FY annualized net income at SEK45m. But I always find it difficult to look at Net Income due to the big impact of how gaming companies account for R&D and such.
Why SEK40m dividend ahead of IPO?
I did not find any an answer in the IPO prospectus. Please help me out if somebody out there knows the answer. But I find it discomforting that the company distributed SEK40m this year in dividend (based on last years profit) only to go to the market and raise SEK440m just a few months later. If the owners of THQ thought market opportunities were so amazing, why did they just recently decide to take a dividend? Tax issues?
By the way, some really cool titles to look forward to from THQ as they have bought good old NovaLogic last month.
People seem upset about Tyranny, but it is still on the Steam best sellers list.
Owning sharea of companies which make most of their sales on Stream - it feels like the market is open 24-7 as Steamcharts are updated every hour of every day. When I am not watching the chart of the stock price I am watching how they are selling on Steam.
Tyranny at no 2 at Planet Coaster at no 7. Looking good.
On the Sniper Ghost Warrior 3 twitter account there has recently been some really cool footage posted. I only play a few games myself but this looks like it could be one of those games.
Cool in-game drone footage: https://twitter.com/SGW3Game/status/797206458563751936
Very nice looking landscape footage: https://twitter.com/SGW3Game/status/795664910776762372