Publisher valuations

With earnings seasons behind us and some big fluctuations in the stock prices I thought it would be worth taking a step back and seeing where each of the publishers sit in terms of their fundamentals.  The table below uses the latest forecasts that have just been given and the share prices as they are at the time of this post.  I have not included THQ since they are going through a major re-structuring and their fundamentals could change significantly once they have sorted themselves out.  I have also not included Zynga since they are in such a different space that they are not directly comparable.  Perhaps for another time.

The two metrics that I am going to use are forecast p/e and price/sales.  Forecast p/e is the valuation of the company relative to how much money they are forecasting to make for the current financial year.  In broad terms, the higher the forecast p/e, the better the market sentiment is towards the stock and the better it judges their ability to grow earnings.  Price/sales is a metric that I don't like as much since, as it was famously said, sales are for vanity, earnings for sanity.  However, I include it because it does give some sense of how much the sales of the relative companies are valued.

Share price

Market Cap

Earnings forecast

Revenue forecast

Forward p/e Price/sales
Activision $11.4 $12,700m $0.94 eps $4,500m 12.13 2.82
EA $12 $3,800m $1.13 eps $4,300m 10.62 0.88
Majesco $1.74 $70m $0.25 eps $135m 6.96 0.52
Ubisoft €5.2 €492m €70m** €1,180m 7.03 0.42
Take Two $9.65 $871m $2.13 eps $1,800m 4.53 0.48

**  Due to different accounting treatment it is a little difficult to find the earnings figure for Ubisoft which equates most directly to non-GAAP earnings of the US publishers particularly with regards to tax treatment.  Many thanks to tsanalysis for helping to get to the best figure for comparison purposes.

Looking first at the price/sales ratio of the various companies then what we see is that Activision is on its own with a price/sales multiple of more than three times that of its nearest rival, EA, and about six times that of the lowest rated, Take Two and Ubisoft.  This clearly show that Activision's sales are regarded as far more valuable than that of the other publishers.  Similarly, EAs sales are judged to be worth almost double that of the other publishers.  Part of the reason for this will simply be down to size: EA and Activision have far bigger overall sales than the other publishers and with scale comes a perception (rightly or wrongly) of less risk since they can afford for something to go wrong far more than the smaller publishers. 

However, Activision's sales are almost certainly seen as more valuable since a large proportion come from brands which offer continuous revenue rather than one off hits.  World of Warcraft generates monthly revenues from subscriptions.  Call of Duty provides continuous revenues from Elite and map packs.  Skylanders provides continuous revenues since it is much a toy as a video game.  Clearly, from the fundamentals, the markets value Activision's sales as far more valuable than the other publishers.

Looking at the forecast p/e ratios then there is, yet again, a huge discrepancy between EA/Activision at one end and the other three publishers at the other.  It is probably worth noting that none of the publishers are particularly highly rated.  A forecast p/e of 12 is fairly modest and is below what all of these publishers were on in May of last year.

Looking at Majesco, Take Two and Ubisoft then we can see that they are on a very low forecast p/e which indicates that either the markets don't believe their forecasts, or else think that their future earnings are likely to weaken rather than grow in years to come.  That will not necessarily come as a surprise given how video game sales have fallen off a cliff in 2012 but it is worth noting that the very weak video game sales would appear to already be priced in to the valuations.

Take Two can be singled out with particularly weak fundamentals which will be down to a combination of this year's earnings being seen as a one-off event, and also worries that they will not be able to hit those forecasts without the release of GTAV which is still to be confirmed. 

It is clear from looking at the fundamentals, that the valuations of these companies is very low both historically and in terms of their metrics.  Implied in the numbers is that these companies, with some degree of variation for each individual publishers, are not seen as having the ability to either meet forecasts or grow their financials over the next few years.  Whether that is a reasonable view from an intelligent market, or a short-sighted interpretation of a difficult console transition remains to be seen.