Kingdom Come II And Upcoming AAA Titles Will Shape Future Prospects

Key Takeaways

• Successful game releases and a strong pipeline of AAA titles are expected to drive substantial future revenue growth.
  
• Strategic divestments and operational improvements strengthen financial health, with plans to optimize structure potentially enhancing profitability.
  
• Embracer Group faces challenges with growth sustainability, declining mobile game profitability, new release dependencies, industry volatility, and cash flow pressures impacting financial flexibility.

Catalysts

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

• Successful release and continued sales momentum of Kingdom Come: Deliverance II, which has already sold nearly 2 million copies and is expected to continue generating substantial revenues, impacting future revenue growth positively.
  
• A strong pipeline with SEK 7 billion invested in upcoming games, including several AAA titles expected over the next few years. This should drive future revenue and earnings growth as these titles are released.
  
• Structural and financial improvements, including divestments and cash flow generation leading to a net cash position, which provide a strong foundation for operational efficiency and strategic focus, potentially improving margins and overall profitability in the future.
  
• Enhanced focus on operational efficiency and plans for additional spin-offs and asset separations, such as Coffee Stain & Friends, which are expected by 2025, could unlock shareholder value and improve net margins by optimizing the company’s structure.
  
• Investments in mobile gaming and user acquisition strategies, particularly in CrazyLabs, are expected to drive user growth and long-term revenue, although short-term profitability may be impacted by acquisition costs.

Embracer Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Embracer Group's revenue will decrease by 16.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -48.1% today to 10.3% in 3 years time.
• Analysts expect earnings to reach SEK 2.3 billion (and earnings per share of SEK 17.41) by about March 2028, up from SEK -18.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK3.2 billion in earnings, and the most bearish expecting SEK-1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the SE Entertainment industry at 25.8x.
• Analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

Embracer Group Future Earnings Per Share Growth

Risks

• Despite the initial success of Kingdom Come: Deliverance II, the company only saw a 7% organic growth in Q3, which may indicate challenges in maintaining or accelerating this growth across other segments. This could impact future revenue growth rates if not addressed with more consistent high-performing releases.
  
• The profitability of mobile games is under pressure due to increased user acquisition costs, with EBIT margins declining from previous high levels. While investments in user acquisition are expected to yield returns, there is a risk that these costs will not lead to adequate revenue growth, thereby impacting net margins.
  
• Embracer's reliance on new releases like Kingdom Come II to drive growth exposes them to risks associated with delays and development challenges, which could lead to cash flow and revenue timing issues that impact earnings consistency.
  
• The broader gaming industry is described as being in a state of significant transition, with challenges from consumer demand shifts, inflation, lack of risk capital, and advances such as AI. These factors could introduce volatility in revenues and increase operational costs, impacting net margins and overall earnings.
  
• With significant investments still committed to game development, Embracer might face continued pressure on cash flow and capital efficiency if the expected returns are not realized, reducing financial flexibility in upcoming years and impacting net debt levels and earnings.

Valuation

• The analysts have a consensus price target of SEK152.231 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 SEK180.0, and the most bearish reporting a price target of just SEK108.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK22.0 billion, earnings will come to SEK2.3 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of SEK101.42, the analyst price target of SEK152.23 is 33.4% 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.