Tomb Raider Focus Will Shape Future Prospects Amid Risks

Key Takeaways

• Refocused on core IPs, recurring revenue, and cross-media expansion to improve margins and capture growth from the entertainment-gaming convergence.
  
• Restructuring, asset divestments, and capital discipline aim to boost cash flow, streamline operations, and enable shareholder returns.
  
• Ongoing underperformance and restructuring have increased revenue volatility, margin pressure, and reliance on fewer core titles, heightening risks to future earnings and cash flow recovery.

Catalysts

Develops and publishes PC, console, mobile, VR, and board games for the games market worldwide.

• The company is reallocating capital and operational focus toward its established core IPs (e.g., Lord of the Rings, Tomb Raider), expecting to double their investment allocation into these higher-return franchises this year and significantly expand recurring revenues through sequels, DLCs, and transmedia extensions-an expected driver of improved revenue and gross margin.
  
• Embracer is executing a significant restructuring-divesting non-core assets, tightening cost control, and reducing fixed costs-that is anticipated to materially improve free cash flow and net margin beginning in FY '27 and beyond as the group transitions to a leaner, more cohesive structure.
  
• The company is well positioned to benefit from digital adoption and the rising share of gaming in global leisure time due to the breadth and scalability of its IP portfolio and an increasing cadence of AAA releases, which should underpin long-term top-line growth.
  
• The buildout of cross-media adaptations via Middle-earth Enterprises-including licensing, merchandise, and collaborations-positions Embracer to capitalize on the growing convergence between gaming, streaming, and entertainment, supporting high-margin, recurring revenues.
  
• The upcoming Coffee Stain spin-off and capital allocation discipline are expected to unlock shareholder value-while Embracer's strong net cash position provides flexibility for both organic investment and capital returns, with management explicitly stating intent to distribute excess cash post-spin, potentially lifting future EPS.

Embracer Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Embracer Group's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.1% today to 11.7% in 3 years time.
• Analysts expect earnings to reach SEK 2.6 billion (and earnings per share of SEK 9.51) by about September 2028, down from SEK 4.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 4.6x today. This future PE is lower than the current PE for the SE Entertainment industry at 22.9x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Embracer Group Future Earnings Per Share Growth

Risks

• Continued year-over-year declines in net sales (31% headline, -2% organic) and adjusted EBIT, largely driven by weaker performance in PC/Console segments and insufficient new releases, pose a risk of ongoing revenue and earnings pressure if not reversed by future game launches.
  
• Margin contraction due to a segment mix shift towards lower-margin Entertainment & Services, and reliance on cost controls rather than top-line growth, could constrain long-term net margin and profitability as growth becomes increasingly reliant on less lucrative business lines.
  
• Increasing development costs, heightened competition, and recent underperformance of releases (PC/Console and Mobile, e.g., Kingdom Come: Deliverance II, Killing Floor 3 sales below expectations; negative organic Mobile growth) raise the risk of failed execution resulting in missed revenue and weaker ROI on core IP investments, ultimately impacting earnings.
  
• Restructuring (divestments, studio closures, spin-offs like Coffee Stain) and reliance on a narrower core IP focus reduce portfolio diversification and scale, making Embracer more vulnerable to single-title underperformance and potential revenue volatility in coming years.
  
• A "transition year" outlook, conservative guidance, and management's acknowledgment of further possible delays or underperformance-combined with competitive risks from major industry releases and shifting consumer demand-suggest an elevated risk of persistent muted revenues, delayed earnings recovery, and potential pressure on free cash flow.

Valuation

• The analysts have a consensus price target of SEK115.222 for Embracer Group 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 SEK160.0, and the most bearish reporting a price target of just SEK81.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK22.1 billion, earnings will come to SEK2.6 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 7.3%.
• Given the current share price of SEK82.07, the analyst price target of SEK115.22 is 28.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.