Delayed Launches And Surging Costs Will Test Future Resilience

Key Takeaways

• Repeated delays and project management issues threaten the company's diversification, increase development costs, and contribute to greater earnings volatility.
  
• Heavy reliance on a single franchise, rising competition, and regulatory challenges risk shrinking margins, revenue, and long-term market relevance.
  
• Successful new game launches, platform expansion, and user engagement efforts could diversify revenue and strengthen Pearl Abyss's growth, offsetting reliance on legacy franchises.

Catalysts

Engages in software development for games.

• The persistent and repeated delays in launching Crimson Desert, now postponed to the first quarter of 2026 after years of missed deadlines, signal ongoing challenges in project management and execution. This undermines Pearl Abyss's ability to diversify beyond its core franchises and increases the risk of surging research and development costs, which will continue to weigh on earnings and heighten revenue volatility.
  
• As global regulatory scrutiny intensifies on digital content and monetization models, Pearl Abyss faces the threat of rising compliance costs and potential constraints on its in-game revenue streams. This will likely erode net profit margins and limit the company's ability to monetize its games across key international markets.
  
• The overreliance on Black Desert as the primary revenue generator is becoming increasingly precarious, given the risk of franchise fatigue and demographic changes such as an aging gamer population in key regions. Declining user engagement and stagnant new user acquisition may lead to long-term contraction in top-line revenue.
  
• Escalating competition from larger Western and Chinese gaming firms with broader platform ecosystems is expected to erode Pearl Abyss's market share and reduce its ability to command premium pricing. Higher user acquisition and marketing costs, evidenced by the spike in advertising expenses this quarter, will compress operating margins over time.
  
• Rapid shifts toward alternative gaming formats, such as cloud gaming and play-to-earn models, threaten to make Pearl Abyss's current portfolio of MMORPGs and console titles less relevant. If Pearl Abyss fails to successfully pivot or innovate quickly enough, this structural risk will undermine future revenue growth and put long-term earnings at risk.

Pearl Abyss Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Pearl Abyss compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Pearl Abyss's revenue will decrease by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.1% today to 23.4% in 3 years time.
• The bearish analysts expect earnings to reach ₩73.4 billion (and earnings per share of ₩1145.34) by about August 2028, up from ₩48.0 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 23.6x on those 2028 earnings, down from 40.8x today. This future PE is greater than the current PE for the KR Entertainment industry at 19.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.33%, as per the Simply Wall St company report.

Pearl Abyss Future Earnings Per Share Growth

Risks

• The successful launch and positive reception of Crimson Desert, Pearl Abyss's first large-scale AAA console game, could significantly expand the company's revenue base and diversify earnings beyond the legacy Black Desert and EVE IP, potentially leading to a strong revenue inflection point in 2026 and improved net profit margins.
  
• Continuous updates and feature enhancements to Black Desert and EVE, including new regions, PvP content, and live community events, have resulted in heightened user engagement and improving metrics, which could translate into more recurring revenue streams and stable operating margins over the long term.
  
• Active expansion into new platforms such as PlayStation 5 and Xbox Series X and S, alongside providing console users with PC-level content parity, positions Pearl Abyss to capture a growing global console gaming audience, supporting future top-line growth and helping to mitigate platform concentration risks.
  
• Ongoing development and marketing efforts for emerging projects like the blockchain-based EVE Frontier and the global appeal of upcoming titles signal the company's commitment to innovation, which can drive future revenue growth and offset potential declines from legacy franchises.
  
• Pearl Abyss's proactive engagement with user communities through major industry events, real-time feedback incorporation, and well-communicated road maps can bolster player retention, improve product relevance versus competitors, and enhance the effectiveness of in-game monetization strategies, potentially lifting both revenue and net earnings over time.

Valuation

• The assumed bearish price target for Pearl Abyss is ₩21724.18, which represents two standard deviations below the consensus price target of ₩34710.0. This valuation is based on what can be assumed as the expectations of Pearl Abyss'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 ₩47000.0, and the most bearish reporting a price target of just ₩19000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩313.6 billion, earnings will come to ₩73.4 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 9.3%.
• Given the current share price of ₩31900.0, the bearish analyst price target of ₩21724.18 is 46.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.