Restructuring And Business Expansion Will Increase Competitiveness And Diversify Revenue Streams

Key Takeaways

• Restructuring and new ventures in gaming and anime aim to boost revenue, with aggressive VTuber investments enhancing profitability through diverse income streams.
  
• Transitioning business models to stable, recurring revenue sources across sectors could improve margins, while new console game ventures diversify revenue streams.
  
• Sensitivity to market conditions and rising costs could impact short-term revenue consistency and profit margins across multiple segments.

Catalysts

Operates internet and entertainment, investment, and incubation business.

• The Game and Anime Business is undergoing restructuring to streamline operations and expand, which aims to increase competitiveness and achieve faster market response. This is expected to contribute to future revenue growth and potentially improve operating margins.
  
• GREE Holdings has made significant investments in the VTuber Business, achieving record-high sales in the second quarter. Continued aggressive investment in this area is likely to foster further revenue growth and enhance profitability due to diverse income streams from live events and merchandise sales.
  
• The company is planning a full-scale entry into the console games sector, which represents a significant new revenue stream and diversification of its existing gaming portfolio. This expansion is anticipated to drive future revenue growth and possibly contribute to higher overall earnings.
  
• The DX Business is being transitioned from a project-based to a recurring earnings model, with an emphasis on new SaaS product releases. This shift is aimed at creating stable, predictable revenue streams, which could lead to improved net margins and operating profit.
  
• The Investment Business plans to transition from proprietary fund investments to GP investments with external funding, targeting significant profit growth from management fees and investments. This could stabilize earnings and reduce reliance on market conditions, impacting long-term profit margins positively.

GREE Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GREE Holdings's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.0% in 3 years time.
• Analysts expect earnings to reach ¥6.0 billion (and earnings per share of ¥35.1) by about March 2028, up from ¥4.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, up from 20.1x today. This future PE is greater than the current PE for the JP Entertainment industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

GREE Holdings Future Earnings Per Share Growth

Risks

• The Investment Business segment is subject to near-term volatility due to its sensitivity to market conditions, which could adversely impact consolidated revenues and profit margins.
  
• The Game and Anime Business faces rising promotional costs in advance of new title releases and potential delays in release schedules, which could reduce net margins and earnings in the short term.
  
• Seasonal factors and shifts in consumer demand may lead to fluctuating sales performance in the Game and Anime and Metaverse Businesses, affecting quarterly revenue consistency.
  
• Sales growth in some areas of the platform business within the Metaverse segment has been below initial forecasts, possibly impacting longer-term revenue targets if trends do not improve.
  
• The transformation of the DX Business into a recurring revenue model involves significant upfront investment in new product development, which could constrain short-term earnings and net margins before the anticipated benefits are realized.

Valuation

• The analysts have a consensus price target of ¥653.333 for GREE Holdings 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 ¥750.0, and the most bearish reporting a price target of just ¥580.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥67.0 billion, earnings will come to ¥6.0 billion, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of ¥570.0, the analyst price target of ¥653.33 is 12.8% higher.
  
• 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.