Head of Equity Strategy
Summary: The gaming industry has for years been a strong and high growth industry driven by the adoption of mobile gaming significantly increasing engagement. CD Projekt is one of the older gaming developers in Europe and has predominantly stayed with games on desktop and consoles, and been through tough 18 months with revenue declining rapidly. The company has recently stabilised its business and presented yesterday its new long-term vision for the company which investors seem to be buying into. We take a look at the company and also the overall gaming industry.
CD Projekt sets sail for a new long-term strategy
CD Projekt is one of the leading European gaming developers and has risen 46% since early September despite first-half year result disappointed against estimates but delivered net income growth of 8% y/y. The gaming developer said it would deliver a long-term strategy vision for the company and this new vision came yesterday. It includes working on two AAA gaming projects which are Witcher and a new title. In addition, the deputy CEO is stepping down and joining the supervisory board instead and a new share buyback programme of PLN 100mn has been initiated. The company also says that it will add multiplayer elements to its video gaming pipeline, which has a lot of potential due to higher engagement in multiplayer, and the gaming developer has said that it will not sell new shares to finance the new gaming projects.
The market has been betting on good news from CD Projekt and with the stock price up 5% today extending on yesterday’s move it seems investors are buying into the long-term strategy. The past 18 months have been tough for the company as revenue has declined from PLN 2.1bn in 2020 to just PLN 796mn in the past 12 months. The equity valuation, measured on 12-month forward EV/EBITDA, is still 150% above the MSCI World Index suggesting high expectations for growth in the future.
The gaming industry was one of the biggest winners during the pandemic as people sought online entertainment during their lockdowns which was reflected in the 2020 performance of our gaming theme basket (see 5-year chart below). But since the reopening engagement has fallen and gaming developers such as Sony and Microsoft have experienced declining revenue. The median 12-month revenue growth in our gaming basket has fallen to 5.4% and margins have down but still are strong at around 22.2% for the industry. Analysts have maintained their high price targets with the average stock being 41% below the price targets.
As PwC’s Global Entertainment & Media Outlook suggests gaming revenue will continue to grow healthy over the next 4-5 years. We remain bullish on the industry longer term as the gaming industry has a more compelling business model than video streaming which is the biggest competitor on the consumer’s time for leisure. Short-term risks for the industry are the high electricity making gaming more expensive, cost-of-living crisis lower available income for gaming, and higher interest rates compressing valuations even more.
5-year price chart on Saxo’s gaming theme basket and MSCI World
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