Rising Development Costs And Lack Of New Releases May Weigh On Earnings, But Cyberpunk 2077'S Success Could Boost Future Growth

Key Takeaways

• Absence of major new game releases may limit future revenue growth, despite strong sales from existing titles like Cyberpunk 2077.
  
• Heavy R&D investments and ambitious financial targets may strain margins, with diversification efforts posing uncertain impacts on earnings growth.
  
• Strong demand for Cyberpunk franchise and strategic expansions suggest potential for increased revenue, while high profitability and cash reserves indicate robust financial resilience.

Catalysts

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

• Despite impressive sales milestones, such as Cyberpunk 2077 reaching over 30 million copies and Phantom Liberty selling 8 million copies, the absence of major new game releases in the immediate future may limit revenue growth prospects. With current sales primarily driven by existing titles, future revenue growth could struggle without fresh releases impacting the top line significantly.
  
• Substantial administrative and research expenses are expected to continue, especially with ongoing investments in projects like Orion, Canis Majoris, and Hadar. These expenditures, while intended for future growth, are currently a financial burden that may weigh on net margins and earnings if not carefully managed.
  
• The transition of major projects like Project Polaris into their production phases suggests upcoming increases in development costs. If these projects face delays or budget overruns, it could negatively influence net margins and earnings before new revenue streams materialize.
  
• CD Projekt's aggressive financial targets in its incentive programs, such as achieving a PLN 3 billion cumulative net profit for the 2024-2028 period, imply a high-pressure environment. Failure to meet these ambitious targets could lead to investor disappointment, impacting earnings expectations and stock valuation.
  
• Expansion into platforms such as Apple M4 Macs and collaborations on new media projects like a Netflix animation signify a push for diversification. However, the financial impact of such diversification is uncertain, and if these initiatives do not perform as expected, they could result in opportunity costs affecting overall earnings growth.

CD Projekt Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CD Projekt's revenue will grow by 33.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 39.4% today to 39.8% in 3 years time.
• Analysts expect earnings to reach PLN 1.1 billion (and earnings per share of PLN 10.43) by about December 2027, up from PLN 439.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting PLN 1.2 billion in earnings, and the most bearish expecting PLN 65 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2027 earnings, down from 42.9x today. This future PE is greater than the current PE for the PL Entertainment industry at 17.7x.
• 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 9.92%, as per the Simply Wall St company report.

CD Projekt Future Earnings Per Share Growth

Risks

• Cyberpunk 2077 has reached over 30 million copies sold, indicating sustained demand that could potentially drive future revenues and profitability.
  
• The Phantom Liberty expansion has sold 8 million copies in just over a year, demonstrating continued strong interest in the Cyberpunk franchise, which might positively impact future earnings.
  
• The release of Cyberpunk 2077 on new platforms, such as Macs with Apple silicon, expands market reach and can potentially increase sales revenue.
  
• Collaborations with platforms like Netflix for Cyberpunk animations could enhance brand visibility and indirectly boost franchise-related sales, supporting revenue growth.
  
• CD Projekt's strong net profitability of 38% despite the lack of new releases, along with a substantial cash reserve of PLN 1.4 billion, suggests financial resilience that might bode well for future profit margins.

Valuation

• The analysts have a consensus price target of PLN 145.78 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 PLN 241.0, and the most bearish reporting a price target of just PLN 90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be PLN 2.6 billion, earnings will come to PLN 1.1 billion, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of PLN 188.7, the analyst's price target of PLN 145.78 is 29.4% 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.