Acquisitions Of Haemimont Games And Alien Dawn Will Diversify Portfolio

Key Takeaways

• Expanding into new game segments and strategic DLC packaging aim to boost player engagement and drive diverse revenue growth.
  
• Improved development efficiency and strategic release scheduling during sales periods could enhance cash flow and bolster future earnings growth.
  
• Revenue decline and volatility, currency fluctuations, high costs, and risk-prone financial strategies challenge Paradox Interactive's predictable financial performance and profitability.

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 and Stranded: Alien Dawn is expected to strengthen Paradox Interactive's game portfolio, enabling expansion into the management game segment. This diversification and potential new game releases could positively impact future revenue streams.
  
• Paradox's strategy of releasing expansion passes for key intellectual properties (IP) and packaging larger chunks of DLC is aimed at enhancing player engagement and retention. This approach is anticipated to boost revenue by driving sales of new and existing games.
  
• The company's increased efficiency in game development with upfront cost recognition and reduced balance sheet load may improve cash flow predictability and margins in the long term.
  
• Paradox expects significant future releases and activities in Q2 and Q4, which they state generally coincide with sales spikes from Steam's summer and winter sales. This trend could lead to robust revenue growth during these periods.
  
• Ongoing investments in game development, like with Bloodlines 2, and a strong pipeline of new titles and DLC releases may drive future revenue growth and earnings, as the company stabilizes its release cadence.

Paradox Interactive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Paradox Interactive's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.6% today to 36.5% in 3 years time.
• Analysts expect earnings to reach SEK 1.1 billion (and earnings per share of SEK 9.03) by about May 2028, up from SEK 581.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, down from 34.4x today. This future PE is greater than the current PE for the SE Entertainment industry at 20.2x.
• 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 6.7%, as per the Simply Wall St company report.

Paradox Interactive Future Earnings Per Share Growth

Risks

• Revenue has decreased by 4% compared to the same quarter last year, primarily due to fewer game releases, impacting overall revenue generation and growth.
  
• Significant volatility in revenue is observed due to the dependency on quarterly releases, leading to fluctuations in financial performance and affecting predictable earnings and cash flow.
  
• Currency fluctuations have created headwinds, notably the stronger SEK against the dollar leading to unfavorable currency exchange impacts, affecting both net margins and overall profit.
  
• High upfront costs and amortization of game development expenses can strain financial resources, impacting net margins and profitability.
  
• The aggressive allocation of costs before projects reach alpha status increases financial risk, potentially impacting net margins and earnings if projects are canceled.

Valuation

• The analysts have a consensus price target of SEK214.0 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 SEK250.0, 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 SEK3.0 billion, earnings will come to SEK1.1 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of SEK189.5, the analyst price target of SEK214.0 is 11.4% 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.