ARK's Mobile Launch And New Indie Games Will Expand Future Revenue Streams

Key Takeaways

• Strategic focus on high-quality DLC and expanding ARK's mobile presence can improve user engagement and revenue growth.
  
• Expanding indie label with new game titles diversifies income and strengthens future revenue streams.
  
• Delayed DLC launches and reliance on major franchises could impact revenue growth, diversify risks, and affect short-term cash flow and investor confidence.

Catalysts

Researches, develops, markets, publishes, and distributes interactive digital entertainment for consumers worldwide.

• The ARK franchise has shown significant player engagement and success, with continued investment in new DLC content and expansions, which is expected to drive future revenue growth.
  
• The launch of Bellwright into Early Access on Steam was well-received, with substantial unit sales and high wishlist numbers, indicating potential for future revenue and earnings improvement as the game fully launches and matures.
  
• Expansion of Snail’s indie publishing label, Wandering Wizard, with new titles like “The Cecil: The Journey Begins” and “Chasmal Fear” slated for early 2025, could drive future revenue and diversify income streams.
  
• The strategic slowdown in DLC releases for ARK: Survival Ascended to focus on quality has been effective, and continued support and development of high-quality content can enhance user retention and potentially improve net margins.
  
• Introduction of ARK: Ultimate Survivor Edition on mobile platforms later this year could expand the user base and increase revenue, capitalizing on the mobile gaming market's growth potential.

Snail Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Snail's revenue will grow by 16.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 21.1% in 3 years time.
• Analysts expect earnings to reach $29.3 million (and earnings per share of $0.77) by about January 2028, up from $3.1 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 6.5x on those 2028 earnings, down from 20.8x today. This future PE is lower than the current PE for the US Entertainment industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 1.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Snail Future Earnings Per Share Growth

Risks

• The company's strategy of slowing down the cadence of DLC launches from every 2 months to every 3 months could impact revenue growth, as it may lead to slower uptake of new content and possibly reduce engagement from the player community.
  
• Reliance on non-GAAP measures like bookings and EBITDA might obscure underlying financial health, potentially making it more difficult for investors to assess true profitability and stability, impacting investor confidence and stock valuation.
  
• The shift towards mobile platforms with games like ARK: Ultimate Survivor Edition introduces execution risks, which could impact net margins if development costs increase or the mobile market reception does not meet expectations.
  
• Dependence on a few major franchises like ARK and limited update flexibility, as seen with The Animated Series, may pose a risk to diversified revenue streams – if these franchises underperform, it could significantly impact Snail’s overall earnings.
  
• Increased deferral of revenue from sales of not-yet-launched content indicates potential future earnings but also highlights a risk of delays or failure to deliver expected content, which could affect short-term cash flow and net income stability.

Valuation

• The analysts have a consensus price target of $4.0 for Snail based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $138.7 million, earnings will come to $29.3 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of $1.75, the analyst's price target of $4.0 is 56.2% 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.