Releasing AION 2 And Utilizing AI Will Expand Future Global Presence

Key Takeaways

• Targeted global releases and focused investments in new IPs aim to drive revenue growth and improve net margins through resource allocation.
  
• Commitment to shareholder returns and AI utilization is intended to boost shareholder value, operating efficiency, and income margins.
  
• Declining mobile game sales, operational inefficiencies, and internal instability threaten NCSOFT's revenue growth and market stability amidst competitive pressures.

Catalysts

Develops and publishes online games worldwide.

• NCSOFT plans to release new global titles, such as AION 2, and leverage lessons from previous launches to target different markets (Korean, Taiwanese vs. North American, European), which could drive future revenue growth.
  
• There is an increase in investments for new IPs, targeting specific genres like shooter games, and the company plans to focus on targeted IP marketing strategies, which may enhance net margins by effectively allocating resources.
  
• The company's commitment to a shareholder return policy, such as cash dividends and share buybacks, aims to increase shareholder value and EPS over time.
  
• NCSOFT's utilization of AI technology aims to enhance game development efficiency and potential new revenue streams, thus positively impacting operating costs and increasing net income margins.
  
• An ongoing focus on M&A, especially in clustering shooter games, indicates potential revenue growth through expansion into high-demand markets and synergistic acquisitions.

NCSOFT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCSOFT's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 14.4% in 3 years time.
• Analysts expect earnings to reach ₩271.1 billion (and earnings per share of ₩8779.06) by about March 2028, up from ₩94.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩378.0 billion in earnings, and the most bearish expecting ₩164.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.7x on those 2028 earnings, down from 33.1x today. This future PE is lower than the current PE for the KR Entertainment industry at 28.7x.
• Analysts expect the number of shares outstanding to decline by 2.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

NCSOFT Future Earnings Per Share Growth

Risks

• A significant decline in mobile game sales, which represents a major revenue stream, could impact overall revenue growth if trends continue.
  
• Q4 operating loss and increased marketing expenses might indicate inefficient cost management, affecting net margins negatively.
  
• The company is experiencing a challenging competitive landscape in the MMORPG market, which potentially limits future revenue growth and market share.
  
• Uncertain outcomes from new IP investments and M&A efforts can pose risks, impacting the stability of earnings and cash flow.
  
• Voluntary resignation programs and restructuring efforts signal potential internal instability, which might affect overall operational efficiency and future earnings.

Valuation

• The analysts have a consensus price target of ₩206720.0 for NCSOFT 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 ₩310000.0, and the most bearish reporting a price target of just ₩111000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩1876.6 billion, earnings will come to ₩271.1 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of ₩157800.0, the analyst price target of ₩206720.0 is 23.7% 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.