Expanding Anime Production And New Game Releases Will Drive Future Profitability

Key Takeaways

• CyberAgent's focus on anime content and IP expansion is expected to enhance profitability and boost future revenue and operating margins positively.
  
• Leveraging AI in Internet Advertising is set to improve operational efficiency, while new game releases aim for revenue growth and improved earnings.
  
• Delays and underperformance in gaming and media segments, combined with investment risks, threaten CyberAgent's profitability and net margins amidst competitive pressures.

Catalysts

Engages in the media, internet advertising, game, and investment development businesses primarily in Japan.

• The Media & IP segment, including ABEMA, is gradually decreasing losses and is focusing on increasing content production, particularly in anime, which can potentially boost future operating profits as they monetize IPs. This could impact revenue and net margins positively over time.
  
• CyberAgent is leveraging group synergies to expand its IP business, launching Cygames Pictures and CA Soa to produce anime content. This strategic expansion into anime production is expected to drive increased profitability, impacting revenue growth and operating profit margins in the future.
  
• The Internet Advertising business has continued to grow at a double-digit rate and is poised to improve operating profit margins through the implementation of AI, which is expected to increase operational efficiency and profitability, impacting net margins positively.
  
• Despite some current underperformance in the Game business, CyberAgent plans to release six new game titles, including international versions, this fiscal year. If successful, these releases may contribute to revenue growth and improved earnings.
  
• CyberAgent's strategy of reinvesting profits from its Internet and Game businesses into the Media segment, to build globally significant IPs, aims to drive long-term revenue growth and profitability by expanding into international markets, thus potentially increasing future earnings.

CyberAgent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CyberAgent's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 3.3% in 3 years time.
• Analysts expect earnings to reach ¥31.1 billion (and earnings per share of ¥61.05) by about January 2028, up from ¥16.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥42.8 billion in earnings, and the most bearish expecting ¥26.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, down from 35.3x today. This future PE is greater than the current PE for the JP Media industry at 17.0x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.98%, as per the Simply Wall St company report.

CyberAgent Future Earnings Per Share Growth

Risks

• The Game business has experienced a decrease in operating profit by 4.1% due to some titles not performing well, which might affect future revenue and earnings.
  
• ABEMA, part of the Media & IP segment, is still operating at a loss, which could continue to weigh on net margins if not turned profitable soon.
  
• The Internet Advertising business, although growing, has had a flat operating profit margin (OPM) for some time, which could impact net margins and the overall profitability of the segment.
  
• The company's reliance on the success of new game titles and significant releases, which were delayed, poses a risk to revenue if these do not perform as expected in the highly competitive gaming market.
  
• The heavy investment in AI and upfront costs associated with the Advertising business carry execution risk, which might not translate into increased operating profit margins as anticipated, impacting overall earnings.

Valuation

• The analysts have a consensus price target of ¥1205.33 for CyberAgent 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 ¥1400.0, and the most bearish reporting a price target of just ¥1000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥943.5 billion, earnings will come to ¥31.1 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of ¥1134.0, the analyst's price target of ¥1205.33 is 5.9% 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.