Tougher Regulation Will Drag Gaming Revenue But Resilience Will Arise

Key Takeaways

• Reliance on a small number of hit game launches and costly development strategies increases revenue volatility and puts pressure on margins if titles underperform.
  
• Regulatory, demographic, and competitive headwinds threaten long-term user engagement, revenue growth, and sustainability in core and expanding markets.
  
• New title launches, structural cost improvements, and efficient expense management position Netmarble for increased profitability and reduced reliance on concentrated revenue streams.

Catalysts

Develops and publishes PC, mobile, and console games in South Korea and internationally.

• Netmarble faces intensifying global regulatory scrutiny on gaming addiction and in-app monetization, which could result in stricter laws and ultimately reduce average revenue per user and overall revenue growth, especially given the company's reliance on mobile and MMORPG monetization models.
  
• Heightened competition for consumer screen time from non-gaming digital platforms such as short-form video, social media, AR/VR, and other interactive experiences is likely to erode Netmarble's user engagement and retention, undermining long-term revenue and making repeated game launches less dependable as a growth engine.
  
• Ongoing dependence on a handful of hit new games such as Seven Knights Re:BIRTH and RF ONLINE NEXT raises the risk of severe revenue volatility and net margin contraction, especially as recent quarter-over-quarter revenue gains were driven almost entirely by the initial launch boost of these titles-momentum that is difficult to sustain in the face of franchise fatigue and fierce genre competition.
  
• Increasing development and marketing costs required to create and distribute large-scale, cross-platform titles, combined with the company's ambitious release pipeline, may further compress operating margins and sap free cash flow, particularly if even a small number of new launches underperform or face delays as alluded to in management's commentary.
  
• Long-term demographic trends such as declining birth rates in core Asian and Western markets threaten to substantially shrink Netmarble's future addressable user base, exacerbating the pressure on both revenue and earnings sustainability as the company attempts global and regional expansions.

Netmarble Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Netmarble compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Netmarble's revenue will decrease by 1.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 9.4% in 3 years time.
• The bearish analysts expect earnings to reach ₩234.6 billion (and earnings per share of ₩2703.68) by about September 2028, up from ₩92.5 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 15.8x on those 2028 earnings, down from 52.6x today. This future PE is lower than the current PE for the KR Entertainment industry at 16.3x.
• 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 10.13%, as per the Simply Wall St company report.

Netmarble Future Earnings Per Share Growth

Risks

• The successful launch and early momentum of new titles such as Seven Knights Re:BIRTH and RF ONLINE NEXT, combined with plans for ongoing updates and regional expansion for these games, suggest that Netmarble could sustain or grow revenue in the near to medium term by leveraging both user engagement and market diversification.
  
• A downward trend in commission rates due to the increasing share of self-developed IP titles and the adoption of PC payment channels across more games is structurally improving Netmarble's cost base, which could support higher net margins and strengthen profitability over time.
  
• The company's ability to efficiently manage labor and marketing expenses as a percentage of revenue, despite launching multiple new titles, points to improved operational leverage and the prospect of stable or improving operating margins.
  
• A robust pipeline of seven new games slated for release in the second half, along with planned global launches and regional expansions, could drive incremental top-line growth and mitigate risks of revenue concentration or stagnation.
  
• Nonoperating income, notably from equity-method gains and the HYBE PRS contract, has contributed significantly to quarterly profitability; if positive valuation trends continue or asset values appreciate, this could provide ongoing supplemental support to net earnings.

Valuation

• The assumed bearish price target for Netmarble is ₩34240.41, which represents two standard deviations below the consensus price target of ₩67476.19. This valuation is based on what can be assumed as the expectations of Netmarble'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 ₩91000.0, and the most bearish reporting a price target of just ₩32000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩2487.3 billion, earnings will come to ₩234.6 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 10.1%.
• Given the current share price of ₩59400.0, the bearish analyst price target of ₩34240.41 is 73.5% 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.