Aging Core Franchises And Rising Regulation Will Drag Down Prospects

Key Takeaways

• Heavy reliance on aging franchises and demographic headwinds threaten recurring revenue and limit long-term growth prospects.
  
• Rising regulatory pressures and escalating operating costs compress margins and hinder global expansion amid intensifying competition.
  
• Strong franchise growth, successful innovation, and strategic partnerships position NEXON for sustainable international expansion, resilient revenue streams, and enhanced shareholder value.

Catalysts

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

• Revenue concentration is heavily tied to a few aging core franchises, such as MapleStory and Dungeon & Fighter, making the company vulnerable to fading interest and engagement as these titles mature, which is likely to result in revenue stagnation or declines as user bases erode.
  
• As global regulators intensify scrutiny around digital transactions and online gaming practices, NEXON faces mounting compliance costs and constraints on game monetization, which threatens to compress net margins and limit future earnings growth, especially as microtransaction models come under further regulatory threat.
  
• Demographic shifts in major Asian markets, especially Korea and Japan, point to a shrinking pool of young core gamers, creating a headwind for sustained user base expansion and ultimately capping or reducing the long-term growth potential of key franchises, making recurring revenue less reliable.
  
• NEXON's ongoing struggle to consistently develop global blockbuster new intellectual properties exposes it to intensifying competition from larger US, Chinese, and emerging market developers, eroding international market share and making future revenue diversification uncertain.
  
• Escalating platform fees, royalty costs, and marketing spending-coupled with higher user acquisition costs necessary to maintain visibility in a crowded market-will eat into net margins even if top-line revenue from new releases or regional expansions temporarily outperforms, undermining the sustainability of any earnings momentum.

NEXON Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NEXON compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NEXON's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 22.8% today to 18.6% in 3 years time.
• The bearish analysts expect earnings to reach ¥82.4 billion (and earnings per share of ¥101.6) by about August 2028, down from ¥102.1 billion 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 21.8x on those 2028 earnings, down from 26.1x today. This future PE is lower than the current PE for the JP Entertainment industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 3.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

NEXON Future Earnings Per Share Growth

Risks

• NEXON's ability to reignite growth in established franchises like MapleStory and Dungeon & Fighter, along with highly successful regional expansions and new game launches, demonstrates strong recurring revenue potential and suggests that future revenues could remain robust or even grow.
  
• The rapid adoption and exceptional performance of new titles such as MABINOGI MOBILE, ARC Raiders, and MapleStory: Idle RPG shows NEXON's capacity to innovate and diversify its portfolio, which can drive international revenue growth and reduce dependence on legacy titles.
  
• Continued investment in live service operations and user-generated content platforms, exemplified by MapleStory World's 7x year-over-year growth and high engagement in new markets, indicates that NEXON can capture value from long-term industry trends like increased player engagement and community-driven monetization, supporting future earnings and margins.
  
• Strategic collaborations and co-development initiatives with partners like Tencent for hyper-localization and content adaptation in key markets demonstrate an ability to adapt to market conditions and bolster long-term growth trajectories, positively impacting both revenues and operating income.
  
• A large and ongoing share buyback program, coupled with a strong commitment to shareholder returns and efficient capital deployment, directly supports share price appreciation and earnings per share growth over the long term.

Valuation

• The assumed bearish price target for NEXON is ¥2033.73, which represents two standard deviations below the consensus price target of ¥2977.78. This valuation is based on what can be assumed as the expectations of NEXON'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 ¥3700.0, and the most bearish reporting a price target of just ¥1900.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥443.2 billion, earnings will come to ¥82.4 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of ¥3339.0, the bearish analyst price target of ¥2033.73 is 64.2% lower.
  
• 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.