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Analysis of THQ Nordic (renamed Embracer Group)

THQ Nordic was founded 2008 and it is a Swedish video game company that develops and publishes PC, console and mobile games. The company has an extensive catalogue of over 100 owned franchises, including: Darksiders, Metro, Saints Row, Goat Simulator and many others. The company also acts as a partner publisher to other developer studios. The company is led by it’s founder and CEO Lars Wingefors who owns 35% of the equity in the company. The company has a market cap of 2.4 billion USD. 

THQ Nordic, like many other game developers does not distribute the games they develop themselves, instead they sell their games on digital distribution platforms like Steam, Playstation Store and Xbox Games Store. PC games have in recent years primarily been sold on Steam which has a 70/30 revenue split between developers and themselves. Throughout 2019 however, new distribution platforms have been launched which has increased the competition - to the benefit of content producers. While Steam has a 70/30 revenue split one of the new new distribution platforms, Epic Games Store has a 88/12 revenue split between developers and themselves. The competition between these platforms may create a price war which will further benefit content producers. THQ Nordic and its subsidiaries have signed multiple deals with various platforms in order to get a more favourable revenue split and to reduce financial risk. For example THQ subsidiary Deep Silver announced that Metro Exodus will be solely sold on the Epic Games Store. As a result of the more favourable deals between the platforms and content producers the company will increase its revenue with the release of new titles on these platforms. 

THQ Nordic is unique in its ability to use M&A in the video game industry to increase revenue and expand their game catalogue. The company has acquired several game developers and game publishers. In addition to buying developer studios THQ frequently buys IP-rights to games from other companies. THQ Nordic is profitable and it uses a lot of the cash it generates to finance these acquisitions. Because the cash generated by its businesses is primarily used to acquire new studios and IP-rights using valuation metrics that are dependent on earnings are not as relevant. Instead of prioritizing short term earnings goals THQ Nordic is focused on expanding their game catalogue and creating shareholder value over the long term. In addition to using the cash generated by its businesses the company has on several occasions issued new shares in order to raise money to further strengthen M&A capacity. The company has a strong balance sheet and by issuing new shares it does not have to take on debt to finance acquisitions.  
Among those companies that THQ Nordic have acquired are:
Koch Media - developer of the Saints Row series and publisher for the Metro series
Warhorse Studio - developer of Kingdom Come: Deliverance
18POINT2 - one of the leading Australian video game publishers
Coffee Stain - developer of Goat Simulator
Piranha Bytes - developer of Gothic, Risen and ELEX
Among others. 

THQ Nordic has repeatedly shown that it can absorb these companies, take care of the brands and ensure continued growth. The game developer studios that are acquired often retain some autonomy over themselves but are granted resources and help from THQ and synergies between the organizations are created. In a traditional acquisition when companies acquire smaller companies they try to absorb them into the main organisation and this often requires a restructuring to take place. However, as small developer studios often are founder led it is vital to keep key employees at the company after an acquisition and by offering certain autonomy over themselves to the studios after a sale more game developers are open to selling to the THQ organization. Through its many acquisitions this model has been shown to be very effective as there are more opportunities available because more studios are open to a sale. 


THQ Nordic
Paradox Interactive
EA
Activision Blizzard
P/B (Price/Book value)
3.9
17.2
4.12
3.1
Gross margin
71%
65%
78%
67%
P/S  (Price/Sales)
4
14.17
5.41
4.85
EV/R (Enterprise Value/Revenue)
3.43
13.8
4.66
4.54
Unlike other video game companies such as EA and Activision Blizzard, THQ Nordic does not focus on the AAA-video game segment which is highly competitive. Developing and marketing a AAA-game is very costly and if a smaller studio were to develop such a game the company’s success is reliant on the performance of that single game. Instead of being reliant on just a few big titles, which is financially risky, THQ focuses on other segments of games where there is less competition. Targeting gaming niches also makes it easier to predict how the games will perform and to build strong brands in those segments. As of now, the company has 80 different games under development. When looking at THQ Nordic and other video game companies one should bear in mind that the company may perform better some quarters than others. This is because major game titles may have been released specifically during that period and therefore it is more relevant to look at how the company is doing on a yearly basis instead of comparing the two most recent financial quarters. However, the company has said that digital back-catalogue sales continued to perform well and that the company is involved in subscription-based business models which provides recurring revenue. As a result of this and together with the large number of games being released throughout the year the revenue should not fluctuate too much between different financial quarters. 
The video game industry was estimated to have generated about 140 billion dollars in 2018 and it is forecast to reach 180 billion in 2021. Consumers are now spending more time and money than ever on games, and this is especially true for the millennial generation. People who play video games spend an average of nearly 6.3 hours each week playing, up from 5.1 hours in 2011 and gamers at the age of 18-25 spend the most time playing. It is a booming industry and THQ Nordic is in a good place to take advantage of this. A diversified company such as THQ Nordic that develops and publishes a large number of games for multiple platforms like PC, Console, IOS, Android, macOS, Linux and Wii is a way to invest in this growing industry. 

Catalyst
Increased revenue from new distribution platforms may be a catalyst to the stock price. It is also very likely that the company will continue to grow through M&A and be able to market and monetize the brands that they acquire. 

Update: The company has since changed its name to Embracer Group and a share split has taken place.


Comments

  1. The aggressive M&A strategy has certainly payed off. Also possible that given the current economic environment there will be more acquisition targets for Embracer

    ReplyDelete

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