Studio Restructuring And New Game Releases Set To Drive Revenue And Boost Margins

Key Takeaways

• NCSOFT's diversification strategy in genres and platforms, along with upcoming new titles, aims to broaden audience and drive revenue growth.
  
• Restructuring and cost optimization efforts are intended to improve operational efficiency, reduce costs, and enhance net margins in future years.
  
• The company faces financial challenges from currency losses, rising costs, restructuring, and execution risks, impacting sales, profitability, and resource allocation.

Catalysts

Develops and publishes online games worldwide.

• NCSOFT is implementing a diversification strategy to include a variety of genres (RPG, strategy, shooter, subculture, and MMO) and platforms (console and PC), expanding beyond their traditional MMORPG focus. This approach aims to increase revenue streams by catering to a broader audience and launching multiple titles including the anticipated AION 2, LLL, and TACTAN in the upcoming years.
  
• The company plans to release highly anticipated new titles, such as Journey of Monarch and BREAKERS, which are expected to drive significant sales growth. By releasing five new titles next year and engaging in external collaborations, NCSOFT aims to enhance its revenue and earnings through successful new product launches.
  
• NCSOFT is transitioning to a dedicated development studio system and initiating corporate spin-offs to enhance creativity and operational efficiency. This restructuring is expected to optimize costs by reducing headcount and improving resource allocation, which should positively impact the company's net margins and operating leverage in the future.
  
• Cost optimization initiatives, including a voluntary resignation program and project shutdowns, aim to address high fixed costs and operating leverage. By reducing its workforce and restructuring, NCSOFT seeks to improve its cost structure, which should lead to better net margins and earnings starting in 2025.
  
• Strengthened global publishing capabilities, including partnerships like the one with Amazon, are aimed at enhancing NCSOFT's market reach and capitalizing on international opportunities. This strategy is expected to boost revenue and earnings by expanding the company’s audience and increasing its success in global markets.

NCSOFT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCSOFT's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 11.9% in 3 years time.
• Analysts expect earnings to reach ₩231.8 billion (and earnings per share of ₩11624.17) by about January 2028, up from ₩126.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩472.0 billion in earnings, and the most bearish expecting ₩152.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, down from 28.6x today. This future PE is greater than the current PE for the KR Entertainment industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

NCSOFT Future Earnings Per Share Growth

Risks

• The company reported an operating loss and a net loss for the third quarter of 2024, driven in part by foreign currency losses, which could negatively impact earnings if such currency volatility continues.
  
• There has been a significant increase in operating and marketing costs, with marketing costs rising 180% Q-o-Q and 76% Y-o-Y, suggesting that maintaining sales growth could come at the expense of net margins if this trend continues.
  
• The company is dealing with high fixed costs and is undergoing restructuring, including stopping projects and voluntary resignations, which could introduce short-term financial instability and one-off costs, affecting net margins and overall profitability.
  
• Sales of key titles, such as TL's early access packs, did not meet expectations, highlighting the risk associated with heavy reliance on existing and new IPs to drive revenue growth.
  
• The transition to a studio-based system and reliance on diversification across different game genres and platforms could pose execution risks, potentially leading to misallocation of resources and impacting revenue and earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of ₩224111.11 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 ₩135000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩1950.1 billion, earnings will come to ₩231.8 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 8.3%.
• Given the current share price of ₩183100.0, the analyst's price target of ₩224111.11 is 18.3% 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.