Digital Transformation And Evergreen Franchises Will Expand Gaming Audience

Key Takeaways

• Strong evergreen franchises, community engagement, and digital expansion are set to drive durable recurring revenue, high player retention, and superior margin growth.
  
• Upfront expensing and efficient project management enhance earnings stability, while experimenting with subscriptions and streaming unlocks powerful new revenue streams.
  
• Heavy reliance on aging franchises, shifting industry trends, rising costs, and failed new projects threaten stability and long-term profitability as Paradox faces increased execution and currency risks.

Catalysts

Develops and publishes strategy and management games on PC and consoles in the United States, Rest of Europe, Sweden, and internationally.

• Analyst consensus is upbeat about the expansion into the management game segment and ongoing franchise strength, but with Victoria 3 and Age of Wonders 4 now proven as new 'evergreen' franchises, the potential for recurring high-margin DLC and robust fan-driven support could drive a more significant and durable uplift in recurring revenue than currently modeled.
  
• While efficiency improvements in game development have been noted by analysts, the ongoing shift to expensing development costs upfront and fail-fast project management not only prevents large write-downs but significantly enhances long-term margin stability and cash flow visibility, likely supporting stronger and more resilient earnings growth than the market expects.
  
• The substantial global expansion of digital distribution, combined with Paradox's robust franchise catalog and evergreen strategy titles, positions the company to rapidly capture a growing segment of adult, premium-paying gamers worldwide, greatly increasing the total addressable market and driving outsized top-line revenue growth over the long term.
  
• Paradox's powerful community-driven model, including deep modding support and gamer engagement, is fostering exceptionally high player retention and ARPU, which should continue to reduce customer acquisition costs and expand net margins far more than most competitors in the space.
  
• The increasing adoption of subscriptions and game streaming platforms, areas where Paradox is already actively experimenting, creates step-change opportunities for the company to monetize its rich back-catalog and long-tail content, unlocking new recurring revenue streams and providing an additional lever for earnings acceleration.

Paradox Interactive Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Paradox Interactive compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Paradox Interactive's revenue will grow by 15.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 32.2% today to 35.9% in 3 years time.
• The bullish analysts expect earnings to reach SEK 1.1 billion (and earnings per share of SEK 10.8) by about August 2028, up from SEK 664.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.3x on those 2028 earnings, down from 26.5x today. This future PE is greater than the current PE for the SE Entertainment industry at 16.7x.
• 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 6.9%, as per the Simply Wall St company report.

Paradox Interactive Future Earnings Per Share Growth

Risks

• Paradox Interactive's over-reliance on a handful of established grand strategy franchises, with top revenue contributors remaining largely unchanged and "evergreen games" like Crusader Kings, Hearts of Iron, and Stellaris still dominating, increases the risk of franchise fatigue and constrains long-term revenue growth if player engagement or interest wanes.
  
• The company's effort to launch new IPs and expansions outside its core strengths, as shown by the costly cancellation and write-downs of projects like Life by You, illustrate execution risk and the potential for periodic major hits to net margin and earnings if such investments do not yield scalable successes.
  
• Rising operating costs from expanding international studios, increased hiring (up to 640 employees), and wage inflation globally could erode Paradox Interactive's historically high margins and profitability as labor costs rise faster than revenue in the long term.
  
• Paradox's legacy DLC business model faces headwinds as the gaming industry shifts toward subscriptions and games-as-a-service models, requiring the company to overhaul its approach and risking less predictable revenue streams and lower up-front sales, impacting near-term and consistent revenue.
  
• Volatility in foreign currency exchange rates, with 97% of revenue in currencies other than SEK and substantial costs remaining in SEK, exposes Paradox Interactive to significant FX risk that can depress both top-line revenue and net profit during adverse currency movements.

Valuation

• The assumed bullish price target for Paradox Interactive is SEK225.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Paradox Interactive's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK225.0, and the most bearish reporting a price target of just SEK150.0.
  
• In order for you to agree with the bullish analysts, 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 25.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of SEK166.8, the bullish analyst price target of SEK225.0 is 25.9% 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.