Witcher Four Delay Will Raise Costs Yet Cyberpunk Will Excite

Key Takeaways

• Delayed Witcher 4 release and strategic franchise management could affect near-term revenue and net margins.
  
• Increased R&D investment and team restructuring may compress margins and extend project timelines.
  
• CD Projekt's strategic expansion and effective management promise strong future growth, driven by popular franchise developments and diverse revenue streams.

Catalysts

Together its subsidiaries, engages in the development, publishing, and digital distribution of video games for personal computers and video game consoles in Poland.

• The decision not to release The Witcher 4 by the end of 2026 could delay expected revenue streams from new game sales, as this is expected to be a major release for the company.
  
• Increased investment in research and development, including the expansion of development teams, suggests higher operational costs in the short term, which could compress net margins.
  
• The integration of the Molasses Flood team and restructuring of project teams may result in increased expenses and prolonged project timelines, potentially affecting near-term earnings.
  
• The strategic shift towards a more active franchise management approach with extended support for Cyberpunk 2077 could lead to increased maintenance costs, impacting net margins if not offset by sufficient revenue growth.
  
• The implementation of a new dividend policy may impact cash flow, as resources could be allocated away from reinvestment into development projects, potentially affecting long-term revenue growth.

CD Projekt Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CD Projekt's revenue will grow by 54.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 47.7% today to 43.6% in 3 years time.
• Analysts expect earnings to reach PLN 1.6 billion (and earnings per share of PLN 12.5) by about April 2028, up from PLN 469.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting PLN2.2 billion in earnings, and the most bearish expecting PLN1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 46.9x today. This future PE is lower than the current PE for the PL Entertainment industry at 16.5x.
• 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 11.01%, as per the Simply Wall St company report.

CD Projekt Future Earnings Per Share Growth

Risks

• CD Projekt's development of The Witcher 4 has generated significant excitement and anticipation, as evidenced by the high viewership and positive media coverage of the game's trailer. This strong public interest could lead to high initial sales and strong revenue upon release. Moreover, their strategic planning and handling of their development workforce and resources suggest a sound management approach that could enhance profitability.
  
• With Cyberpunk 2077 maintaining a high user review score and receiving accolades such as the BAFTA for evolving games, the franchise demonstrates sustained consumer interest and satisfaction. The expansion of the game to additional platforms, such as MacOS, indicates potential revenue growth from reaching new player bases and can contribute to net margins.
  
• CD Projekt is diversifying their product offerings and expanding the universe of their flagship franchises, such as Cyberpunk and The Witcher. This expansion includes additional content like animation projects on platforms such as Netflix, which could drive further revenue streams and enhance overall earnings.
  
• Financially, CD Projekt reported strong results for 2024, particularly with Cyberpunk's impact on sales, indicating solid performance and potential for continued profitability. Their effective cost management through decreased selling expenses and strategic amortization adjustments can positively impact net margins and sustain attractive earnings.
  
• The company has a strategic plan in place for long-term growth, including a recruitment push and an increase in development team sizes. These actions are aimed at supporting an ambitious development pipeline, which could lead to robust revenue streams and improved profit margins as new projects come to fruition.

Valuation

• The analysts have a consensus price target of PLN175.75 for CD Projekt 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 PLN292.0, and the most bearish reporting a price target of just PLN95.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN3.6 billion, earnings will come to PLN1.6 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 11.0%.
• Given the current share price of PLN220.5, the analyst price target of PLN175.75 is 25.5% 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.