AI Innovations And Game Expansions Propel Global Growth For A Profitable Future

Key Takeaways

• Investment in AI and deep learning aims to enhance user experience and reduce costs, potentially increasing future net margins.
  
• Focus on diversified games, emerging markets, and collaborations seeks to expand user base and drive revenue growth.
  
• KRAFTON's heavy reliance on PUBG IP and costly expansions into new markets like India face risks, compounded by currency issues and high investment in AI and new IPs.

Catalysts

Develops, distributes, and sells mobile game and application software in Asia, Korea, the United States, Europe, and internationally.

• KRAFTON's investment in AI and deep learning technologies, including the development of unique small language models (SLM), is expected to enhance user experience and reduce operational costs, which could increase net margins in future periods.
  
• The company is diversifying and expanding its game lineup with games like inZOI and Subnautica 2, which are expected to generate additional revenue streams and broaden its strong global IP franchise.
  
• KRAFTON's strategic focus on emerging markets such as India, combined with localized content and third-party publishing opportunities, is likely to expand their user base and drive revenue growth.
  
• Collaborations and continuous updates on PUBG IP, including new modes and in-game content, aim to sustain and grow PUBG's user base, directly impacting revenue growth positively.
  
• Strategic investments and partnerships with game development studios and new creative ventures like Dinkum and Palworld are anticipated to strengthen KRAFTON's portfolio, potentially boosting long-term earnings and broadening the company's market reach.

KRAFTON Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KRAFTON's revenue will grow by 14.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.8% today to 34.2% in 3 years time.
• Analysts expect earnings to reach ₩1195.8 billion (and earnings per share of ₩25952.85) by about November 2027, up from ₩891.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩1715.5 billion in earnings, and the most bearish expecting ₩708.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2027 earnings, up from 15.6x today. This future PE is lower than the current PE for the KR Entertainment industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

KRAFTON Future Earnings Per Share Growth

Risks

• KRAFTON's reliance on the PUBG IP for revenue growth may face challenges if demand proves cyclical rather than structural, potentially impacting long-term revenue stability.
  
• The increase in labor, marketing, and platform costs due to new hires and development efforts could pressure net margins if revenue growth does not keep pace.
  
• Exposure to currency fluctuations led to a substantial foreign exchange-related non-operating loss, affecting net earnings and highlighting vulnerability to global market dynamics.
  
• International market expansions, such as into India's competitive gaming market, pose execution risks that might affect revenue and profitability if local adaptations are ineffective.
  
• Significant investment in AI and new IPs, while promising for future growth, involve inherent risk and might not yield the anticipated returns, impacting overall earnings performance.

Valuation

• The analysts have a consensus price target of ₩427413.79 for KRAFTON 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 ₩510000.0, and the most bearish reporting a price target of just ₩290000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩3494.7 billion, earnings will come to ₩1195.8 billion, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of ₩305500.0, the analyst's price target of ₩427413.79 is 28.5% 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.