Seeking Alpha • Aug 25
Gravity Is Cheap But Ragnarok Online Is Getting Old
Summary
Gravity managed to create some QoQ growth despite broader trends showing declines in gaming, and it is being held up by the original Ragnarok Online title.
PC gaming is more resilient, and that's where the Ragnarok IP is selling better, with PC games being more dedicated than mobile gamers.
The Gravity strategy is to milk the Ragnarok Online franchise to death, something that started in the early 2000s and holds a lot of nostalgia value with players like MapleStory.
The offshoots on mobile are low-quality games that earn through licenses and royalties from other developers, part of a strategy to re-engage IP fans as much as possible in pay-to-win games.
They are making headway in new geographies, but these pay-to-win games don't have much longevity. RO is aging and doesn't have a valuable growth profile.
Gravity (GRVY) trades cheaply because it should. This is not a vibrant videogame company, and its strategy isn't built for long-term growth, just for milking the 20-year-old Ragnarok IP like a cash cow. Whether it's over or undervalued is less clear, because they have growth and profits for now, but don't invest in this thinking it's a representative videogaming company and should follow broader secular support for games as entertainment. Their strategy is to gather low-hanging fruit rapidly before they rot. What is next for the company is unclear. The cash pile is nice, but you can't just create a new title, especially in a market that is so competitive nowadays. We pass.
Gravity Strategy
Ragnarok Online is an old MMO that a lot of people hold dear as an accessible game from their childhoods. There are plenty of fans, and they still play the PC version of the game from time to time. There's not much wrong with this original title, except that it's getting old. Videogames aren't interesting forever, even World of Warcraft became stale after the 5th or 6th expansion. Ragnarok Online dominates the 'Online Gaming' segment, and it's driven by nice economics from subscription revenues. People engage with the game much in the same way ageing fans go back to games like MapleStory and even RuneScape, although the Asian influences shared with MapleStory make it a closer comp to RO. They are managing to grow this game by introducing it into new geographies, specifically China. But China is not such a friendly market for gaming anymore. Thailand was a major new market that was responsible for most of the delta in online gaming revenues these last years. But it is now in decline, with the game sticking for a few years, which isn't bad, but not forever.
Online Segment Revenues (20-F GRVY)
In general, the RO title is ageing. We look at it like a worse WoW. At some point, it will just go into an inevitable decline, especially since MMOs rely heavily on network effects. It's a bit of a death spiral when that starts to happen over a more protracted period of time. But we don't hate RO.
What we really don't like is the mobile segment, which is by far the majority of the revenue. The strategy is to license out the Ragnarok IP to mobile developers who make low-quality pay-to-win 'gacha games' in many instances that really don't stick. We see the shift as Gravity licenses out the IP as of late.
Mobile Segment Revenue (20-F GRVY)
The total revenues aren't growing that fast. We think the probability that these games have rather short engagement periods as people get bored of P2W mechanics and grind-style games on mobile, which is anyway a medium that isn't as dedicated for gaming and generally less engaging, is pretty high. While growth is being sustained by new releases under the Ragnarok IP creating licensing revenue, it's just not very sustainable. Indeed, even in the licensing mode of making money, things aren't blasting off, they already are trending into a plateau.
Conclusions
The relative resilience of the online gaming segment is evident in the Q2 results, with it growing in the mix.