Acquisition Of Haemimont Games Will Expand Game Portfolio And Drive Player Engagement

Key Takeaways

• Strategic acquisitions and successful expansion passes boost game portfolio and monetize franchises, enhancing future revenue and margins.
  
• Improved quality control and user-generated content foster consistent earnings, player engagement, and monetization opportunities, driving revenue growth.
  
• Paradox Interactive's focus on high-risk projects and reliance on existing franchises poses challenges to revenue stability and growth, highlighting the need for strategic diversification.

Catalysts

Develops and publishes strategy and management games on PC and consoles in North and Latin America, Europe, the Middle East, Africa, and the Asia Pacific.

• The acquisition of Haemimont Games, which has a successful track record with strategy and management games, is expected to be a strategic fit that enhances Paradox's game portfolio through quality releases, potentially boosting future revenue streams.
  
• Introduction and success of Expansion Passes, such as for Hearts of Iron IV, indicate a stronger monetization strategy for existing franchises, which could lead to higher future revenue and improved margins.
  
• Implementation of improved quality control and management pipelines to mitigate the risk of costly game project failures, which is likely to lead to more consistent earnings and better net margins.
  
• Focus on user-generated content as a growth pivot, which could foster increased player engagement and expanded monetization opportunities, thereby driving revenue growth.
  
• Potential for further mergers and acquisitions in a market currently described as a crisis, which could provide opportunities for strategic expansion and revenue growth without significantly impacting the company's risk profile.

Paradox Interactive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Paradox Interactive's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.6% today to 34.4% in 3 years time.
• Analysts expect earnings to reach SEK 1.1 billion (and earnings per share of SEK 10.47) by about February 2028, up from SEK 584.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2028 earnings, down from 38.4x today. This future PE is greater than the current PE for the SE Entertainment industry at 26.1x.
• 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 6.3%, as per the Simply Wall St company report.

Paradox Interactive Future Earnings Per Share Growth

Risks

• The company has experienced significant financial write-downs related to failed projects like Lamplighters and Life by You, leading to significant negative impacts on profits, and raising concerns about potential future project failures impacting earnings.
  
• Paradox Interactive reported a highly volatile revenue stream, highly dependent on the release cycle of their existing franchises, indicating potential instability in consistent revenue generation without new successful game releases.
  
• The company's decision-making in past years led to costly high-risk projects, raising concerns about resource allocation and risk management, which could potentially impact future net margins if new measures do not prove effective.
  
• The acquisition of Haemimont Games, though strategic, involves potential integration risks that could affect operating efficiencies and profit margins if cultural or operational synergies are not realized.
  
• Despite a strong current financial position bolstered by DLC releases, the dependence on established franchises creates long-term concerns about growth prospects and sustainability, potentially impacting overall revenue expansion if new IPs do not succeed.

Valuation

• The analysts have a consensus price target of SEK231.0 for Paradox Interactive 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 SEK280.0, and the most bearish reporting a price target of just SEK160.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK3.2 billion, earnings will come to SEK1.1 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK212.8, the analyst price target of SEK231.0 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.