New Dungeon&Fighter Releases Will Drive Global Expansion, But Uncertainties May Impact Revenue Targets

Key Takeaways

• Co-development with Tencent and new Dungeon&Fighter titles aim to boost revenue via increased user acquisition, market expansion, and localized content for China.
  
• Investments in talent and content, along with a significant share buyback, focus on franchise longevity and enhancing shareholder value.
  
• Ongoing challenges in key franchises coupled with operational losses and market risks threaten NEXON's revenue projections and margins amidst high industry uncertainty.

Catalysts

Produces, develops, distributes, and services PC online and mobile games in Japan and internationally.

• Nexon's co-development agreement with Tencent aims to increase production capabilities and localize content for the Chinese market, potentially boosting user acquisition and engagement for the Dungeon&Fighter franchise. This could lead to an increase in revenue and stabilize earnings.
  
• The introduction of new Dungeon&Fighter franchise titles, such as The First Berserker: Khazan, Project OVERKILL, and Dungeon&Fighter: ARAD, targets global market expansion and aims to generate incremental annual revenue of more than ¥10 billion from each title. This expansion is expected to drive future revenue growth.
  
• A rebound in MapleStory's active user numbers and satisfaction in Korea, along with improvements in global markets, suggests potential recovery and growth. This could lead to a meaningful increase in revenues and improve net margins by maintaining player engagement.
  
• The commitment to significant investments in talent and content development reflects Nexon's strategy to strengthen franchise longevity, aiming to drive both top-line growth and sustainable net income improvements over the medium to long term.
  
• The ¥100 billion share buyback policy is intended to enhance shareholder value and reflects management's confidence in future growth prospects. This initiative could positively impact earnings per share (EPS) by reducing the number of shares outstanding.

NEXON Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NEXON's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.2% today to 23.0% in 3 years time.
• Analysts expect earnings to reach ¥110.1 billion (and earnings per share of ¥142.12) by about April 2028, down from ¥134.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥133.0 billion in earnings, and the most bearish expecting ¥80.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from 12.6x today. This future PE is greater than the current PE for the JP Entertainment industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 1.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.65%, as per the Simply Wall St company report.

NEXON Future Earnings Per Share Growth

Risks

• The ongoing challenges with the Chinese Dungeon&Fighter franchise, including the slow growth and failure to meet revenue expectations, may continue to impact future revenue projections and overall market confidence. Revenue is particularly at risk if recovery is slower than anticipated.
  
• NEXON's cost structures, including the increase in HR costs due to talent investments and performance-based bonuses, coupled with recent operational losses, could exert pressure on operating income, impacting net margins negatively.
  
• Regulatory or market challenges in China, where NEXON has significant operations, can be exacerbated by cultural and player preference changes, threatening established and new revenue streams if hyperlocalization and adaptation are not successfully executed.
  
• The potential impact of industry-wide issues, such as the decrease in major professional soccer events leading to reduced fan engagement in their FC franchise, may affect revenue streams, leading to lower than expected earnings in the absence of growth in other franchises.
  
• NEXON’s reliance on a new content release strategy for sustainable revenue streams involves significant uncertainty. If new franchise extensions and global market introductions do not perform as anticipated, there could be substantial risks to achieving revenue targets and maintaining healthy earnings growth.

Valuation

• The analysts have a consensus price target of ¥2426.882 for NEXON 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 ¥3000.0, and the most bearish reporting a price target of just ¥1700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥478.7 billion, earnings will come to ¥110.1 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 6.7%.
• Given the current share price of ¥2073.0, the analyst price target of ¥2426.88 is 14.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.