Digital Disruption And Rising Costs Will Erode Flagship Franchises

Key Takeaways

• Intensifying competition from new digital platforms, compliance costs, and reliance on core franchises threaten growth, margins, and industry relevance.
  
• Labor cost pressures and industry shifts undermine operational efficiency, while structural changes may dilute royalty streams and squeeze future profitability.
  
• Strong franchise engagement, cost cuts, tech investment, and Tencent partnership position Ubisoft for improved profitability, margin expansion, and long-term revenue growth.

Catalysts

Produces, publishes, distributes, and operates video games for consoles, PC, smartphones, and tablets in both physical and digital formats in Europe, North America, and internationally.

• The proliferation of alternative digital entertainment platforms-including social media, streaming services, and emerging AR/VR experiences-is drawing consumer attention away from traditional gaming, risking a gradual erosion of Ubisoft's active user base, which could undermine future revenue growth across flagship franchises even as back-catalog engagement remains high today.
  
• Escalating global wage inflation and persistent upward pressure on labor costs, exacerbated by the need to retain top-tier technical talent amidst industry consolidation, will tighten Ubisoft's operating margins and limit any structural cost improvements achieved through recent workforce reductions over the long term.
  
• Regulatory scrutiny and increasing compliance costs tied to digital content, user privacy, and gaming monetization mechanics (such as loot boxes), alongside a global push for more stringent controls on in-game purchases, will drive up Ubisoft's overhead and create operational drag, constraining net earnings growth for the foreseeable future.
  
• Reliance on a handful of core IPs-most notably Assassin's Creed, Far Cry, and Rainbow Six-leaves Ubisoft vulnerable to franchise fatigue and stagnating user engagement, while the new subsidiary structure could dilute economic benefits and royalty streams returned to Ubisoft, ultimately curbing both revenue growth and margin expansion.
  
• The ongoing evolution of cloud gaming and acceleration of generative AI tools are lowering barriers to entry for smaller studios, intensifying competition, which is likely to erode Ubisoft's pricing power and exacerbate market saturation, resulting in slower top-line growth and heightened earnings volatility.

Ubisoft Entertainment Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ubisoft Entertainment compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ubisoft Entertainment's revenue will grow by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -8.4% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach €53.4 million (and earnings per share of €0.34) by about August 2028, up from €-159.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, up from -7.9x today. This future PE is lower than the current PE for the GB Entertainment industry at 55.7x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.1%, as per the Simply Wall St company report.

Ubisoft Entertainment Future Earnings Per Share Growth

Risks

• The enduring popularity and strong engagement for Ubisoft's core franchises, such as Assassin's Creed, Rainbow Six, and Far Cry-each maintaining tens of millions of unique active players annually-suggests long-term resilience in revenue and supports an expanding player base that can lift future earnings.
  
• Ubisoft's aggressive cost reduction program, including a €205 million reduction in fixed costs over the past two years and the aim for a further €100 million in cuts, enhances operating leverage and is likely to drive higher net margins and improved profitability over the coming years.
  
• The strategic partnership and subsidiary creation with Tencent, focused on building evergreen, billion-euro brand ecosystems for the company's top IPs, will both deleverage Ubisoft and unlock ongoing royalties expected to exceed €80 million annually, strengthening the balance sheet and underpinning medium-term cash flow.
  
• Continued investment in upgraded proprietary technologies like the Anvil engine, which allows for higher-quality and faster content releases, positions Ubisoft to capture more recurring revenue and better monetize its development pipeline, supporting revenue growth and margin expansion.
  
• Management guidance highlights a return to positive operating income and free cash flow generation starting in fiscal year '27, with significant new content from major franchises expected in fiscal 2027 and 2028, signaling a likely upswing in top-line growth and company-wide earnings.

Valuation

• The assumed bearish price target for Ubisoft Entertainment is €9.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ubisoft Entertainment's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.3, and the most bearish reporting a price target of just €9.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €53.4 million, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 12.1%.
  
• Given the current share price of €9.45, the bearish analyst price target of €9.0 is 5.0% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.