The Buzz (@bougaferdarren)
| Retailers could really suffer with the Xbox One - margins slashed if this report is correct http://t.co/2OfdZgIp3S — 1 day 13 hours ago | Publisher valuation table updated following most recent round of results. Throws up some interesting aberrations http://t.co/2sqj1SqFve — 1 day 21 hours ago | This article pretty much nails what $msft did wrong at the #xboxone reveal yesterday. Is PR disaster too strong? http://t.co/yKapr0b8Xr — 3 days 22 hours ago | Not just me. Seems the reaction to the new Xbox is negative. Not enough focus on games. Far too much focus on the "one" box to rule them all — 4 days 8 hours ago |
The Discussion
Now that the stock prices have had a chance to react to the latest round of results I thought I would update the “valuations” table which looks at a few key metrics.
A few quick points about the table. Firstly, where there is a forecast range I’ve used the mid-point. Secondly, Ubisoft numbers are non-IFRS which equates pretty closely to US non-GAAP so the numbers are directly comparable. Thirdly, I’ve included Gameloft and Zynga for their market cap information even though they both decline to give full year forecasts so I can’t complete their ratios.
|
Share price |
Market Cap |
Earnings forecast |
Revenue forecast |
Forward p/e | Price/sales | |
| Activision | $15.3 | $17,090m | $0.82 eps | $4,25m | 18.7 |
4.0 |
| EA | $21.8 | $6,550m | $1.20 eps | $4,000m | 18.2 | 1.6 |
| Take Two | $15.9 | $1,370m | $2.17 eps | $1,800m | 7.3 | 0.8 |
| Ubisoft | €9.5 | €908m | €0.83 eps | €1,435m | 11.4 | 0.6 |
| Gameloft | €5.5 | €452 | €0.28* | €244m* | 19.6* | 1.85* |
| Zynga | $3.4 | $2,510m | no forecast |
no forecast |
2 |
* based on analyst forecasts - the company does give an official forecast
Not surprisingly, the biggest mover on the table is Take-Two since we are now in their GTAV year and consequently their revenues and earnings are far higher than they were last year. Consequently, they are now on a single-digit price/earnings for the year, about half of their US peers.
Whilst this make Take Two look ludicrously under-valued, you have to balance off the fact that earnings this year are a spike. Take Two have said that they will be profitable the following year (i.e. they can make money without GTA which they proved with Red Dead Redemption) but their earnings are unlikely to be anything approaching the $2+ which they will earn this year.
However, investors are nothing if not short term and when the numbers for this year start to be reported it seems unlikely that Take Two will remain on such a low p/e multiple.
The other thing that jumps out is that Ubisoft remains on an incredibly low price/sales ratio of just 0.6. Even if you ignore Activision (which exists in a world of its own with regards to price/sales ratio) that is less than half EA and even less than the revenue spike of Take Two.
In terms of price/earnings Ubisoft also lags EA and Activision by about 40%. Ubisoft’s earnings this year are not (like Take Two) lumpy so there is no particular reason why Ubisoft should be valued so low. In simple terms, Activision or EA could buy Ubisoft with up to a 40% premium over the current share price (€13.3/share) and the acquisition would still be accretive, i.e. increase their earnings per share for the acquisition year.
That’s a little over-simplistic but illustrates the valuation gap.
Of course, there are other factors in play which explain the differences in valuations but the markets are imperfect. Some of these differences in ratios are simply because these imperfect markets have created an opportunity to make money for the savvy and knowledgeable investor.
Make sure that’s you.
So, that's all the next-gen consoles revealed from the major format holders and I don't think anybody could have predicted the reaction.
Sony (the arrogant, developer-unfriendly, "we know best" creator of the PS3) got everybody super-excited with their PS4 reveal by taking on all the previous criticism and doing their level best to right the wrongs of the past. They are producing a machine dedicated dedicated to game developers and dedicated to gamers which may do some other stuff too but is all about the absolutely best gaming experience that money can buy. Everybody loved their new attitude and it was a very welcome change after years of Sony thinking that all they had to do was turn up and they would win every battle.
Microsoft (the developer friendly, core-gamer friendly creator of the Xbox 360) decided that since all the gamers loved them they didn't need to bother with gamers and games and showed off a machine which was great if you wanted to shout at your telly, loved US sports and pretend you were living in Minority Report. The big questions (like could you re-sell games, do you need an always-on connection) weren't answered and then in the ensuing interviews, tweets and statements they managed to be vague and contradictory. Even aside from the stupid name (after all, we got used to Wii) this was a PR disaster which boosted Sony's stock price by 9%.
Take away the rhetoric and what you have is two machines that are very similar. Both are based on x86 architecture, both have 8gb RAM and the graphics capability should be comparable. That's great for developers because multi-format costs are drastically reduced. PC, Xbox One, PS4 will have very limited porting costs and consumers should get a very similar experience on all machines.
However, the way they are positioning their devices couldn't be further apart. Sony is targeting the PS4 as a games machine, for gamers, who like games and play games. Microsoft is targeting the One as an entertainment hub which also does games. The problem with that, as I see it, is that when you buy a One you're having to make the decision to go Microsoft for your living room. That's a very different decision to deciding you want to buy a machine to play games on and a trickier one.
It's also (probably) untrue. I'm fairly certain that when it comes right down to it both the PS4 and the One will have very similar abilities when it comes to being an entertainment hub in terms of abilities that would interest people. Let's face it, in all probability nobody is interested in talking to their TV to turn it on or off when pressing a button is easier. It's a great thing to impress your friends with, for about 5 seconds, but once the tech demo is over everybody will go back to pressing buttons.
Similarly, waving your hands around to make gestures may be fun (may be) but it's a gimmick that will last a few days before, yet again, you're back to pressing buttons.
Perhaps the biggest difference between these machines is the fact that you HAVE to buy a kinect with your One. It's part of the system so regardless of whether you want it you've got it...and paid for it. And that seems a real mistake by Microsoft. Ignoring the PR disaster of the launch (inviting the world's gaming community to an event and then treating them as an after thought) bundling in the new Kinect is adding cost to the One which most people (i.e. most gamers) won't be interested in.
If you're playing Forza, FIFA or Call of Duty (the games they showed) then you aren't going to be interested in a Kinect but you are going to be paying for it. That seems a ludicrous decision by Microsoft and one that I just can't understand.
It's E3 in a few weeks and Microsoft have an uphill task to win back the gaming public which has moved towards Sony as the format holder of choice. Have Microsoft with the One made the same mistake as Sony did with the PS3?
Time will tell.
Ubisoft results were very strong, at the top end of guidance for revenue and earnings. More importantly their guidance for next year reflected what they have been saying for a while which was that they would grow revenue and earnings and that this (excellent) year was not a blip. At one point, that sounded a little bit like bravado but with Watch Dogs looking very convincing and two unannounced triple-A games still to come then that does sound realistic.
In numerical terms they are now predicting a 15% growth in sales and a 17% growth in earnings for FY14 and that is probably conservative.
They also changed some of the way they report to (I believe) bring their numbers closer into line with US non-GAAP figures. That is going to make comparisons with their US peers far easier and I'm sure they hope will bring to peoples' attention the fact that, on fundamentals, they are on a lower valuation. Perhaps that point is already getting across because in the day and a half since their results the stock price is up nearly 15%.
When the prices have all settled down a bit I will up date the publisher valuation thread to reflect the latest forecasts and stock price movements.
The Ubisoft warrant continues to trade without any premium to cash. In fact, it seems very reluctant to follow the stock price and is being dragged up almost reluctantly. Several times over the past couple of days there have been arbitrage opportunities with the warrant actually being priced below the price of the stock. There probably isn't enough volume in the warrant to take advantage but it does seem that times are over where there would be a premium for the warrant over and above the cash price.
Of course, because there has been no premium for a while that means the warrant is appreciating far faster than the stock. While the stock is up around 15%, the warrant is up around 60%. In fact, as I type this the warrant is now a "ten-bagger" from last summer. It's been a long time since we've seen that in the video game industry and I hope that regular readers of Bougafer have been able to enjoy this rise. It was referred to last summer as a mis-priced option and I do believe that was the case. These opportunities don't come around very often and I hope that others were able to take advantage.
Take Two results were very strong. Soundly beating both revenue and earnings guidance for Q4 and the full year thanks to stronger than expected sales of (mostly) Bioshock Infinite. For next year they are predicting $2+ earnings guidance and massive revenues on the back of (primarily) GTAV which is going to account for something like 60% of full year revenue.
To be honest, it was quite hard to find any negative news in the results. If I had to search very hard I would say that Bioshock Infinite selling 3.7m is a little bit below my 4-4.5m estimate, Q1 forecast was lower than the analysts were looking for and they weren't especially effusive about next-gen. But really that's grasping at straws, the results were very good.
And on that basis, the stock was up about 8% on the opening and then, while all the other videogame stocks powered upwards all the gains unwound to leave it flat on the day. Which just goes to prove that trying to forecast short term swings is very hard. Given volumes were huge (nearly 10m shares traded yesterday) then it wasn't anybody trying to manipulate the market it was simply....well, simply....who know? Hot money leaving, a big holder taking profits or simply traders deciding that was as far as it was going to go until nearer the GTAV release. It could be any or none of those things.
However, in the current year where the forecast p/e is around 7 and with sentiment returning to the industry it seems inconceivable that the price isn't going to far higher in a few months.
I have to say I'm disappointed though. With the way that EA and Activision have reacted to far worse results, far worse forecasts and far worse fundamentals it does seem rather odd that Take Two seems to be being penalised for reasons that aren't immediately obvious.
Perhaps things will change in the next few days but EA and Take Two were the same price a few months ago and now EA is at $22 and Take-Two is at $16. Given that Take-Two have performed better over that period and have stronger forecasts it doesn't make an awful lot of sense.
But that's investing. And ultimately, if things aren't sensible it creates opportunities for those savvy and brave.
Ubisoft have lifted the lid a little bit on Watch Dogs (Watchdogs? Watch_Dogs?) by having a big press event a few days back which involved them demoing parts of the game. While it's not really possible to read very much into the write-ups in terms of how good the game is, there are a few things that have become clear.
Firstly, the game is a long way through its development cycle and so the November release date seems fairly safe. Secondly, the game is hugely ambitious in terms of depth and breadth. It's going to be available on every platform including, in some way, mobile devices. Next-gen, current-gen (and who knows, they may even release an Atari 64 version) are all catered for and the scope of the game, even from a very tightly controlled demo, is clear.
A very believable 4 year development timescale is talked about and Ubisoft have obviously thrown an enormous amount of development resource at this. In terms of the dumbbell, this game is way, way up one end of it and is clearly something that Ubisoft are hoping will make a huge splash in the gaming world.
Previous years have been all about Assassin's Creed but FY14 is obviously going to be about two games. One tried and tested and one completely unknown but with big expectations.
You're right, I don't place much on insider buying but I think you're also right that if you'd just followed the insiders you'd have made a lot of right decisions.
I would never have thought Gamestop would be getting near $40 but I guess it's good news for the sector if investors are starting to believe in the next console cycle.
The outlook was "okay" in terms of numbers. They're talking about revenue up slightly but profits up a long way because of cost-cutting. I wouldn't call that, in quantitative terms, particularly worthy of a 20% rise in the share price. They were very bullish in their words but, again, that's all really window-dressing because it wasn't coming through in their sales figures.
You could actually argue that EA's numbers would have looked more consistent with Activision's words.
I think NBA Live has lost the war so I can't imagine that doing any serious numbers. FIFA World Cup '14 (or whatever they'll call it) will be in EA's FY15 since it's a summer tournament. I agree that BF4 will do big numbers.
But that's all besides the point given they are only forecasting sales up 5% on the previous year. I agree they'll do it, and may well even beat, but a company making more profit by cutting costs doesn't normally get anybody particularly excited.
Despite what looked like rather mediocre results and a good, if not that exciting, outlook EA shares have powered ahead since the results: up $4 or about 20%. I can't exactly explain that although perhaps their very bullish words (if not numbers) about their future, the change at the top and the fact that EA were once the biggest company in the industry have excited investors. I'm not entirely sure that I buy any of those arguments but I can't think of any other reason for the rise.
We still have to wait and see what happens to Activision who were the opposite of EA. Great results, raising forecasts but very cautious words about the future. They were down considerably on the back of the news that World of Warcraft numbers were falling fast but then rebounded the next day.
Take Two results on Monday and Ubisoft on Wednesday and it's very difficult to predict how the markets will react to what they say. It's always been tricky to try and guess how the markets will react, particularly in the short term, but how things have gone since last week's results has me fairly baffled.
Perhaps I'm not the only one whose a bit puzzled since one of the EA sports execs decided to sell all (yes, all) his shares on the post-results move.
I don't have the full note but Wedbush put out a note about Ubisoft yesterday raising their target but remain neutral. In fact, their target reflects a p/e rating around half of Ubisoft's historical average because they see Ubisoft as suffering from a) launch delays and b) exposure to Nintendo platforms (i.e. Just Dance).
I have to say that the first point seems plain wrong because Ubisoft are one of the better publishers at launching on time. The second is true to some extent but JD has always been more about revenue than profit and if one of their franchises should be in decline (which it no doubt is) then that's the one I'd choose.
With the demise of THQ and the resurgence of Ubisoft I do wonder if Ubisoft will get more attention from the analysts and investment community. If it can really present itself as the fourth of the big publishers (along with EA, Activision and Take Two) rather than a quirky Gallic distraction then it may start to attract the sort of multiples that the others enjoy.
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Front Page Articles
- 30/Aug Front Page Articles
- 03/Aug Take Two Q1 2013 results
- 26/Jul Zynga Q2 2012 earnings
- 26/Jul Gameloft Q2 2012 sales up 35%
- 19/Jul Ubisoft Q1 2013 results
- 15/Jul NPD June - down 29% year on year
- 12/Jul UK May sales down 38%
- 03/Jul NPD in the spotlight
- 28/Jun Free2play (Free to Play)
- 27/Jun New publisher valuations
- 25/Jun Publisher valuations
- 15/Jun May 2012 sales - no cheer
- 05/Jun Wii U (just about) support more than one gamepad
- 01/Jun 2012 continuing to look very tough
- 22/May Take Two Q4 2012 results
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mcp, thanks for the Take Two correction - you're quite right and no idea where I got my original figure from.
I think you'll find that all the US companies have incredible remuneration schemes for their executives. Did you see this report from my twitter feed about Kotick's pay? Going off topic a little bit but, to my mind, it's a scam where you ensure that your remuneration committee is made up of people who have a vested interest in inflating executive pay (because they are also executives with their own remuneration committees) so everybody pats everybody else on the back and executive pay becomes ridiculous. In theory, shareholders could vote against these awards but it isn't that easy to do and, on balance, could affect their investments so they keep their heads down.
It's a scam which is endemic for just about every public company.
However, as you say, Ubisoft tend not to abuse this in the way that the US companies do and they should be applauded for that.
My initial reaction is always to think of Ubisoft's valuation as being out of step because they are French based and on the French stock markets (well, Euronext) but then you look at Gameloft who are on a p/e of something like 20 (based on analyst numbers, not their own forecasts) and you realise that explanation doesn't quite work.
I am, at heart, a fundamental investor which is whey I like to look at the ratios and, based on that, Ubisoft are lagging behind its US peers. Perhaps it will always be that way but it may also just be that they represent the best value play in the sector.