Investments In PokerBaazi And NODWIN Gaming Will Strengthen Future Profitability

Key Takeaways

• Strategic acquisitions and investments in gaming and esports are diversifying revenue sources and strengthening market positions.
  
• Initiatives in AI and operational efficiencies are enhancing profitability and net margins.
  
• The company's heavy reliance on strategic partnerships and international expansion introduces significant execution and integration risks that could affect earnings and profitability.

Catalysts

Operates a gaming and sports media platform in India, Africa, the Middle East, the Asia Pacific, the United States, and internationally.

• Nazara Technologies' significant investment in PokerBaazi, a market leader in India's online poker space, is expected to leverage its strong brand for long-term cash flow generation, potentially boosting earnings and overall revenue.
  
• The acquisition and merger of Kiddopia's parent, Paper Boat Apps, is anticipated to streamline cash flows, enabling more organic and inorganic growth, which can positively affect revenue and EBITDA margins.
  
• Developing centers of excellence, particularly in artificial intelligence, and optimizing operations through shared services are expected to enhance efficiencies, thereby improving net margins and profitability.
  
• Strategic acquisitions like Fusebox Games and investments in fast-growing companies such as esports platform Stan are expected to strengthen their foothold in key markets, driving future revenue growth and diversifying earnings sources.
  
• Expanding NODWIN Gaming's international revenue through new IPs and events in emerging markets suggests increased revenue opportunities, with efforts to improve margins indicating potential net margin enhancements over time.

Nazara Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nazara Technologies's revenue will grow by 24.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 9.8% in 3 years time.
• Analysts expect earnings to reach ₹2.2 billion (and earnings per share of ₹23.05) by about February 2028, up from ₹801.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹2.5 billion in earnings, and the most bearish expecting ₹1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 66.7x on those 2028 earnings, down from 104.3x today. This future PE is greater than the current PE for the IN Entertainment industry at 41.2x.
• Analysts expect the number of shares outstanding to grow by 5.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.61%, as per the Simply Wall St company report.

Nazara Technologies Future Earnings Per Share Growth

Risks

• The company's dependence on high-profile IP partnerships for growth in Kiddopia introduces execution risk, as delays or failures in closing these deals or integrating them effectively could impact revenue and user acquisition.
  
• The increased marketing costs and high cost per trial in the Kiddopia segment suggest potential pressure on net margins and profitability, especially if these investments do not lead to expected growth.
  
• The GST increase in the real money gaming sector has significantly impacted margins, particularly for smaller entities like Classic Rummy, which could result in decreased net revenues until remedial strategies are effectively implemented.
  
• The esports segment's margin improvement is heavily reliant on seasonal spikes, suggesting that off-peak periods could continue to see subdued profitability, affecting overall earnings stability.
  
• Expanding international operations and acquisitions such as Space & Time Media Limited introduce integration risk and potential volatility in earnings due to differing cost structures and market conditions in new geographies.

Valuation

• The analysts have a consensus price target of ₹968.2 for Nazara Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1315.0, and the most bearish reporting a price target of just ₹605.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹22.4 billion, earnings will come to ₹2.2 billion, and it would be trading on a PE ratio of 66.7x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹954.4, the analyst price target of ₹968.2 is 1.4% higher. The relatively low difference between the current share price and the analyst consensus 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.