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.

Did knock-out barriers push Starbreeze shares down?

I hate to blame short-sellers or market manipulators for a stock going down. But I also have a lot of respect for option barriers. They often act as a short term magnet for prices because of the nature of option hedging.

I won't go into details but to make a long story short, an option trader does not care about the direction of a stock, the option trader makes money of the spread and hedges risk by owning the underlying instrument. But around barriers the option trader's life gets difficult because the hedge, the amount of stock needed to be correctly manage the risk (delta), is moving around like crazy (high gamma) because the barrier is a digital event. The option trader does not like this. 

In Starbreeze there are a few warrants in the market which offer a leveraged long exposure to the stock. When the bank (in this case MorganStanley) sells such a product they hedge their risk by buying Starbreeze shares. To enable leverage these warrants have a knock-out level. One of those warrants had a knock-out level at 17.46. As the share price moves towards the knock-out level gamma starts to increase, a situation the option trader normally does not like. If the option trader at any points feels certain that by dumping all of the Starbreeze shares (which are held as a hedge should the stock go up) into the market the knock-out barrier will be hit and the option will be dead, the trader will most likely go for that alternative. 

MorganStanley being a large seller today and lacking any other news around Starbreeze I am inclined to believe that this is what might have caused such a large move in the shares today.

The bad news is that there are more warrants out there with barriers at 16.37 and 15.52 so we might go even lower. 

The release date for RAID, Payday Crimewar and Walking Dead should be published any day now so getting into the stock at these levels looks attractive. But I might just wait until 15.51....

 

Poland is a hotbed for game developers with 9 listed companies

Some top Polish game developers just started a new studio called Stranger New Things. 

You know that Poland is on top of its game when people starting a new studio have worked on Dying Light, Dead Island, Call of Juarez, Hitman and The Witcher.

I recently found this report on the Polish gaming industry and it says that there are 150 firms!

The listed are as far as I can tell (Mcap in PLN):

  • CD Projekt Red (The Witcher, Cyberpunk 2077), Mcap 5600m, 1 year performance +179%
  • CI Games (Sniper Ghost Warrior, Lords of the Fallen), Mcap 412m, 1 year performance +37%
  • 11bit  (This War of Mine), Mcap 313m, 1 year performance +92%
  • Playway, Mcap 288m, 1 year performance -12%
  • Artifex Mundi, Mcap 214, 1 year performance -7%
  • Bloober Team, Mcap 159m, 1 year performance +180%
  • Vivid Games, Mcap 113m, 1 year performance -20% 
  • Farm51, Mcap 73m, 1 year performance +6%
  • Forever Entertainment, Mcap 30m, 1 year performance +160%

Worth mentioning among the unlisted are Techland (Dying Light, Call of Juarez) and Superhot.

Frontier Developments reports 66% YoY earnings growth

Frontier released its trading update for financial H1 2017 which is June-November 2016.

The company reported 66% revenue growth (to £18.1m) compared to the same period the year before.

Planet Coaster had sold over 0.5m copies by the end of the year. 

Elite Dangerous had sold another 300,000 copies since the last update now reaching 2.1m in total.

EBITDA for the 6-month period is expected at £5.7m. 

The company mentioned that they "have a strong programme of updates in place for Planet Coaster which will be released through 2017 and beyond." Together with the Playstation launch of Elite announced for Q2 2017 and the announcement of a third franchise in 2017 the stock still looks cheap from 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.

 

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. 

Frontier Developments sues Atari for $2.2m in Rollercoaster royalies

Story broke by TMZ: http://www.tmz.com/2017/01/03/atari-video-game-royalties-lawsuit/

The suit is related to the development of RollerCoaster Tycoon 3 which Frontier developed for Atari back when Frontier was not self-publishing.

Apperantly the dispute is around how much RCT3 has actually sold. The article is refering to "a website" showing higher salesfigures than Atari was showing Frontier. Might this website be SteamSpy?

If you want exposure to global growth, one pure play is being exposed to the gaming sector

CD Projekt Red has published a fact sheet about themselves which highlights not only their business but also the global potential of the gaming industry. They show the distribution of their revenues and a total of 87% comes from Europe and the US. Only 8% come from Asia & Russia and 5% from the rest of the world. I am pretty ceratin this is representive of most AAA-games today.

There is no reason that The Northern Kingdoms, the land in which The Witcher takes place, could not be located on the screens of Asians, Russians, Africans or South Americans. Especially as The Witcher is rated the world's best RPG.

One of the main reasons for the global imbalance of The Witcher revenues is access to computer power. We can see this represented by the fact that CrossFire is the most played game in the world - a free-to-play game which requires very little in terms of computational power. A lot of Asian gamers are still playing games at internet cafes, as many don't have home access to gaming rigs. One of the big advantages CrossFire has is that it’ll run smoothly on basically anything.

Looking into the future, there are few things that I can think of that are as correlated to GDP growth as access to technology. Thus, as economies grow and move forward more people will have access to gaming, both in terms of time and technology. 

As the world outside of Europe and US continue to grow so will their share of global gaming revenue - and the map above illustrates how huge the potential is, with at least a 5x fold growth potential globally. So if you want exposure to global growth, one pure play is being exposed to the AAA-gaming sector.

CD Projekt Red fact sheet: https://www.cdprojekt.com/en/wp-content/uploads-en/2016/12/factsheet-december2016.pdf

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
     

Interesting investment - Focus Home Interactive

Today I found a really interesting listed gaming distributor. French Focus Home Interactive, listed on the Paris stock exchange.

All their financial information is in French so I have not been able to do proper research but I bought some shares last week anyway because of a positive gut feeling; they are trading below 2 on P/S and have a great roster of games. Although I am not sure if P/S is high or low given that they seem to mainly be a distributor.

Some of the games they distribute on Steam are: Space Hulk Deathwing, Farming Simulator, Blood Bowl, Styx, Divinity and Game of Thrones.

I will return once I have done my analysis.

 

 

CD PROJEKT secures $7 million in innovation funds

https://www.cdprojekt.com/en/media/news/cd-projekt-group-secures-30-million-pln-gameinn-innovation-funds/

"The CD PROJEKT Capital Group has been granted nearly 30 million PLN in R&D funding in the first edition of the GameINN sectoral development program, organized by the National Center for Research and Development (NCBR). All four proposals submitted by CD PROJEKT S.A., along with the proposal submitted by GOG.com, have been approved."