Data Driven Game Investments Will Secure Future Momentum

Key Takeaways

• Focus on cash generation and high-potential games enhances cost management and strengthens the game pipeline, boosting future revenue and earnings.
  
• Diversified revenue through own IP development and multimedia expansions supports stable growth and improved margins.
  
• Heavy reliance on the back catalog and decreased revenues highlights potential risks in sustaining revenue streams and impacts growth, profitability, and future earnings potential.

Catalysts

About tinyBuild

Engages in the development and publishing of video games worldwide.

What are the underlying business or industry changes driving this perspective?

• tinyBuild focuses on cash generation while investing in high-potential games and using data-driven approaches to allocate capital, leading to strong cost management and a robust game pipeline, which could improve future revenue and earnings.
  
• tinyBuild's diversification of revenue streams through increased own IP development across multiple platforms can lead to higher margins and more stable earnings growth, as 77% of gaming revenues are from their own IP.
  
• Launching new games, particularly those with a high number of wishlists on Steam, such as Kingmakers, combined with a focus on multimedia expansions like movies and series, can significantly drive top-line growth and market presence.
  
• Cost reduction strategies, demonstrated by moving from a $7.1 million EBITDA loss to a $3.7 million loss, indicate an improvement in net margins, which should further benefit from higher-margin own IP game releases.
  
• Expansion into new platforms (like Nintendo Switch) and ports of successful games to consoles can enhance revenue streams and increase market share.

tinyBuild Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming tinyBuild's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.7% today to 19.7% in 3 years time.
• Analysts expect earnings to reach $8.8 million (and earnings per share of $0.0) by about August 2029, up from -$3.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.5x on those 2029 earnings, up from -16.2x today. This future PE is lower than the current PE for the GB Entertainment industry at 10.0x.
• 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 8.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company's net game revenues decreased by over 20%, mainly due to a drop in back catalog revenues, indicating potential issues in sustaining revenue streams from existing games. This could impact overall revenue and earnings.
  
• Despite improving adjusted EBITDA through cost-cutting, continued lower revenues and reduction in software development investments suggest potential constraints in growth and new product development, which might affect future earnings potential.
  
• Cash flow from operations declined significantly, driven by lower revenues, which could impact the company's ability to invest in new game development and maintain financial flexibility, ultimately affecting net margins.
  
• The heavy reliance on the back catalog, comprising 87% of revenues, poses a risk if existing titles fail to generate sustained interest, potentially affecting long-term revenue stability and earnings.
  
• Impairment costs related to underperforming games point to potential risks in game development investments, impacting overall profitability and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.09 for tinyBuild based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $44.7 million, earnings will come to $8.8 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 8.5%.
• Given the current share price of £0.1, the analyst price target of £0.09 is 11.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.