MTG B: Earnings Guidance And Reorganization Will Drive Improved Margins Ahead

Key Takeaways

• Growth in mobile gaming, e-sports, and direct-to-consumer channels is expanding MTG's audience, monetization methods, and improving margin prospects.
  
• Strategic acquisitions and global expansion are diversifying MTG's portfolio, reducing risk, and supporting sustained revenue growth.
  
• Heavy dependence on key titles, rising costs, regulatory changes, and increased competition heighten revenue risk, margin pressure, and financial vulnerability for sustained growth.

Catalysts

Through its subsidiaries, engages in the provision of game franchises in Sweden, the United Kingdom, Germany, rest of Europe, Singapore, India, the United States, and New Zealand.

• The increased global uptake of mobile devices is fueling strong momentum in MTG's mobile gaming portfolio, with geographic expansion of Word Games and scaling of new titles like Tile Match and Jigsaw supporting rising daily active users (DAU) and consistent organic revenue growth.
  
• Mainstreaming of e-sports and competitive gaming, along with the rising popularity of live streaming and interactive content, is expanding MTG's addressable audience and opens up new monetization streams in sponsorship and advertising, supporting long-term revenue and earnings growth.
  
• Strategic acquisitions (e.g., Plarium) and investments in new proprietary IPs are consolidating MTG's market position, diversifying its portfolio across genres and markets, and increasing the potential for improved net margins by reducing third-party platform dependency.
  
• The increasing focus on direct-to-consumer (D2C) monetization-enabled by platform rulings and web store initiatives-offers higher margin potential compared to traditional app store revenue sharing, translating to better gross and net margin prospects in future periods.
  
• Ongoing international expansion, especially in high-growth non-U.S. markets, is broadening MTG's user base and revenue streams, reducing geographic risk and supporting resilient top-line growth even amid potential saturation in mature markets.

Modern Times Group MTG Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Modern Times Group MTG's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 10.5% in 3 years time.
• Analysts expect earnings to reach SEK 1.4 billion (and earnings per share of SEK 9.97) by about June 2029, up from SEK 11.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK1.6 billion in earnings, and the most bearish expecting SEK1.2 billion.
• 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 18.9x on those 2029 earnings, down from 1309.2x today. This future PE is lower than the current PE for the GB Entertainment industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 2.62% 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.

Risks

• MTG's heavy reliance on a handful of top-performing titles (with the top 3 games accounting for 50% of total revenues) creates significant concentration risk; if these key titles underperform or decline due to shifting consumer tastes or competitive launches, it could substantially reduce revenue and earnings.
  
• Organic growth in several franchises is being driven primarily by increased user acquisition (UA) spend and geographic expansion rather than improved monetization per user-lower ARPDAU especially in non-core (non-U.S.) markets indicates that declining per-user monetization may persist as a structural trend, which would pressure margins if DAU growth slows.
  
• The gaming industry's ongoing transition to direct-to-consumer models and evolving data privacy regulations introduces material risk to MTG's core monetization strategy (especially through app stores and targeted advertising), potentially reducing both advertising and IAP revenues as well as increasing compliance and platform costs.
  
• The company's aggressive M&A-driven growth strategy (e.g., acquisition of Plarium) has led to a much higher debt load and ongoing M&A and integration costs, elevating financial risk and reducing financial flexibility, particularly if synergy realization is delayed or if acquired businesses underperform, which could impact net income and future cash flows.
  
• Intensifying competition in global gaming and content-both from established rivals and emerging creator-driven platforms-raises content development and UA costs and increases the risk that MTG's current or future titles may struggle to achieve visibility, scale, and profitability, negatively affecting long-term revenue growth and margin expansion.

Valuation

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

• The analysts have a consensus price target of SEK166.25 for Modern Times Group MTG 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 SEK190.0, and the most bearish reporting a price target of just SEK145.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK13.6 billion, earnings will come to SEK1.4 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.6%.
• Given the current share price of SEK120.8, the analyst price target of SEK166.25 is 27.3% 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.