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Bank: Challenging year ahead for games

February 24, 2023

Investment bank Jefferies, which recently opened up detailed coverage of the video games industry, says that from interviews and discussions it has had with investors who generally remain “bullish” on the sector, but view the next 12 months for the sector as challenging.

Jefferies says the sentiment overall was one of “let’s talk next year”, and that the overwhelming theme of investors was that 2024 will be the year of video games stocks, whilst 2023 will be characterised by “cost rationalisations, game cancellations & game launches pushed to next year.”

“Investors believe consolidations are bound to happen given the high fragmentation in the sector, & all of our discussions approached this subject. Fundamentally, investors like the sector’s growth prospects, but we’re seeing incremental capital staying on the sidelines for now in anticipation of further pressures on stock prices. Investors see risk from either ‘more games getting delayed into next year’ or ‘demand being weaker than expected’,” says Jefferies.

Jefferies highlights some of the key players in the games sector. It cites:

· Keywords Studios (Buy, Target £36.0): “All investors we’ve met seem to like the business model, whilst the majority are less keen on the valuation. Large funds seem to like the stock, but see issues around liquidity. JEFview: Some investors noted that they closed their position on valuation grounds alone, we see this as the weakest reason to close a position in a high-growth profitable compounder. There also seems to be general confusion about where to place the stock as some investors believe it should trade in-line with Video Games stocks. We disagree & believe this lower-risk business model should trade at a premium.”

· Rovio (Buy, €8.4): “All investors we’ve spoken with are looking at Rovio from an event-risk perspective. Discussions were centered around Playtika’s acquisition motives, potential for upping the bid & the Hed family’s willingness to sell. JEFview: We continue to view the Angry Birds IP as one of the most well-known IPs in the world (>5bn downloads), with the potential to be exported into other mediums, such as TV shows & series.”

· Ubisoft (UNPF, €17.0): “Investors appear to have low confidence in management since the company cancelled 7 games & announced a €500 million impairment. Investors question the decision-making process & believe that many of those projects could have been stopped well before becoming such an issue. Investor expectations for Skull and Bones are low, but they remain constructive on Avatar. Some investors believe that AC Mirage could “save the year”. On valuation, investors see continual pressure as the US peers have also de-rated & “Ubisoft is tricky because their P/E is not as clean as it is for the US guys. JEFview: On the revenue line we see limited upside potential to an already full consensus, while on the cost line we believe Ubisoft might have overgrown its cost base.”

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