High Gaming Concentration Will Strain Performance Yet Allow Recovery

Key Takeaways

• Heavy reliance on the PAYDAY franchise limits revenue diversification and heightens risk if new content or transmedia efforts underperform.
  
• Regulatory pressures on digital monetization and rising industry competition may constrain profitability and challenge the sustainability of recurring revenue streams.
  
• Heavy reliance on the PAYDAY franchise, increased competition, and uncertain new project outcomes heighten risks to revenue stability, growth prospects, and future profitability.

Catalysts

Develops, publishes, and distributes PC and console games in Europe and North America.

• While Starbreeze has secured full publishing rights to the PAYDAY franchise and can now access 100% of net revenue, the company will continue to owe a 33% royalty payout on PAYDAY 3's profit to Digital Bros., creating an ongoing drag on long-term net margins despite higher gross revenue potential.
  
• Although digital entertainment and gaming markets are growing globally, Starbreeze remains heavily concentrated on the PAYDAY franchise, and faces significant revenue concentration risk if future PAYDAY content or transmedia initiatives underperform or suffer from brand fatigue, which could threaten stable cash flow and earnings.
  
• Starbreeze's increased focus on live service models and direct digital monetization aligns with trends in digital payments and gaming consumption; however, heightened regulatory scrutiny over in-game monetization such as loot boxes and microtransactions could disrupt these recurring revenue streams and raise compliance costs, impacting both revenue quality and net margins.
  
• While the company is benefiting from the broader adoption of high-speed internet and cloud infrastructure, increasing competition from much larger technology and media companies threatens to erode Starbreeze's pricing power and market share, pressuring both top line revenue and sustaining profitability.
  
• Starbreeze has a strong cash position and reduced debt, providing near-term strategic flexibility, but persistent inability to diversify beyond PAYDAY, coupled with the rising cost and complexity of game development across the industry, may constrain long-term earnings growth and expose the company to elevated volatility if future releases fall short of expectations.

Starbreeze Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Starbreeze compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Starbreeze's revenue will grow by 15.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Starbreeze will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Starbreeze's profit margin will increase from -164.1% to the average SE Entertainment industry of 7.5% in 3 years.
• If Starbreeze's profit margin were to converge on the industry average, you could expect earnings to reach SEK 23.1 million (and earnings per share of SEK 0.01) by about August 2028, up from SEK -323.2 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 bearish analyst cohort, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from -1.0x today. This future PE is greater than the current PE for the SE Entertainment industry at 16.3x.
• 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 7.43%, as per the Simply Wall St company report.

Starbreeze Future Earnings Per Share Growth

Risks

• Starbreeze remains heavily dependent on the continued success of the PAYDAY franchise across multiple iterations, which exposes the company to significant revenue concentration risk and could result in sharp drops in revenues and cash flow if franchise fatigue or underperformance occurs.
  
• Despite a recent positive cash position, the company continues to report negative net income, largely driven by ongoing investments in game development, which puts pressure on earnings and may reduce long-term margins if new projects fail to reach commercial success.
  
• The gaming industry is becoming increasingly competitive, with large tech and media conglomerates possessing more resources aggressively expanding into multiplayer and live-service models, making it harder for Starbreeze to maintain or grow its market share and potentially impacting future revenue growth.
  
• Starbreeze is incurring substantial development costs for new projects like Baxter, but clear commercial success has not yet been demonstrated and potential partners are waiting to see more of the finished product, which translates to heightened risk for future revenues and the possibility of write-downs if these investments do not pay off.
  
• Any regulatory changes or shifts in consumer behavior, such as stricter rules around monetization or a decline in demand for traditional console and PC titles in favor of emerging entertainment mediums, could constrain Starbreeze's ability to monetize its portfolio effectively, ultimately depressing future revenues and margins.

Valuation

• The assumed bearish price target for Starbreeze is SEK0.26, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Starbreeze's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK0.45, and the most bearish reporting a price target of just SEK0.26.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK307.0 million, earnings will come to SEK23.1 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of SEK0.19, the bearish analyst price target of SEK0.26 is 26.8% 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.