Here is some research I've gathered and compiled on the video game company GDEV/GDEVW and would like to share. Your feedback & commentary are most appreciated.
Disclosure: I’m long with 20 000 shares.
TL;DR
GDEV is one of the largest pure-play free-to-play (F2P) mobile and PC video game companies by bookings. It has a portfolio of large genre-leading franchises such as MMoRPG Hero Wars, FPS Pixel Gun 3D and puzzle game Island Hopper which position it well in a market that increasingly favours large brands and scale. Organic bookings and sales growth accelerated to +4% and +10%, respectively, in Q1 ‘24 and Q4 ‘23 representing the fastest growth of any peers.
Record high audience expansion due to marketing efficiency with platform commission expense decreasing to a historically low level of 21.9%. Share of the PC market has increased to 38% with 14 million Monthly Active Users (MAU) +17% year-over-year on all platforms.
Company is trading at a ridiculously cheap bargain price of 2$ at a valuation of 4x EV/EBITDA (peers 12x) and 0.5x EV/Sales (peers 1.5x) with high insider ownership.
Cliff notes
GDEV has three key franchises, under which it has several titles:
Hero Wars: Alliance (mobile, Hero wars: Dominion Era (PC), Island Hoppers (mobile and PC), Pixel Gun 3D (mobile and PC). GDEV has several games in development set to launch from late 2024 onwards. All franchises continue to deliver growth.
With several growth levers at its disposal, Cantor expects GDEV to deliver mid to high single digit organic growth in 2024-2025, with potential for 10% growth, positioning GDEV with one of the highest organic growth outlooks in the peer group. As GDEV invests for growth, we believe their margins (2% EBITDA and 4% FCF in 2024) to climb to 20%-30% in the medium term. GDEV trades on a 0.5x EV/Sales versus peers on 1.5x, 4x EV/EBITDA versus peers 12x (ROVIO was bought by SEGA at 20x EV/EBITDA in 2023), with 40% of its equity value in balance sheet cash ($174m).
Cantor Fitzgerald has initiated coverage of GDEV with an outperform rating and a minimum $5 price target. They highlight that GDEV returned to positive organic bookings and revenue growth in Q4 2023 and will continue to deliver consistent positive mid to high single digit organic growth through 2024-2025 driven by robust user acquisition spending, a growing active and paying user base in existing titles and new game launches.
Last but not least, GDEV has taken advantage of the market rout of 2023 and undergone a buy-back offer at 2$ to purchase undervalued shares which reduced its float by 17 million shares.
Investment Thesis
- Mobile and PC free-to-play market has stabilized after two years of declines, with growth resuming in late 2023 and Q1 24, and continuing into Q2 24.
- GDEV’s portfolio of genre-leading franchises, large user base and leading UA expertise leave it well positioned in a market that continues to favour large, established brands and scale publishers.
- Organic bookings growth accelerated to +4% in Q1 24. With several growth levers, organic growth is expected to accelerate to even 10% by FY 24-25.
- EBITDA margins will remain in the high single digit in FY 24-25 due to the investment, but long-term margins should reach 20%-30% offering material long-term profit upside
- With 40% of its market cap in cash, GDEV trades on a 0.5x EV/Sales (peers 1.5x) and has balance sheet optionality.
- The company is trading at around 4x EV/adj. EBITDA, which is way below peer valuations. It also generates decent cash flows from operations with a price target of at least 5$, an upside of 100%.
History
The company has certainly come a long way from its humble beginnings in 2010, which is when its founders first met. At the start of that decade, Fadeev was running a social games development studio, Progrestar, while Boris Gertsovskiy was putting the finishing touches to his plan to start a game business.
Within four years, Nexters was born and the company grew rapidly, particularly following the launch of its blockbuster title — Hero Wars — that first brought it international acclaim. However, it was the strategic decision of 2018 to scale on mobile that really powered the firm to the next level. Since then, Nexters has vastly increased its player base, revenue and team to total over 700 professionals, the bulk of them located in Cyprus.
GDEV is currently rated as one of the top-3 developers in Europe with 400+ millions total game installs worldwide with hit games like Hero Wars, Pixel Gun 3D, Island Hopper and others.
What is Hero-Wars?
The game follows a formula that many mobile gamers will be familiar with: it’s all about building up a team of heroes and watching them make their way through dungeons. If they’re not up to the challenge, you have to grind and enhance them, or you have to work to unlock other heroes who might be better suited to the challenge. It’s a game that’s really easy to get sucked into, filled with daily challenges that start easy and slowly become more and more difficult as you play and those who play it will soon find that it has become a part of their daily routine.
Throughout the year, Nexters has been actively engaged in its Hero Wars franchise. For example, they have divided Hero Wars into two games — the mobile Hero Wars Alliance and the browser-based Hero Wars Dominion Era. Recently they got a collaboration with Crystal Dynamics Tomb Raider and have introduced Lara Croft as a character.
The company has released Hero Wars comic books and animated shorts like Rovio did with its Angry Birds franchise. Mobile games outlet Pocket Tactics included Hero Wars Alliance in selection of the best games in 2023 & 2024 and colleagues from PCGames included Hero Wars Dominion Era in selection of the 19 best browser games of the year!
PIXEL GUN 3D on PC: The new Blockbuster
The PC version of Pixel Gun 3D was released on STEAM on April 2nd and it was one of the platform’s strongest game releases in a while. PG3D broke into the TOP-20 successful new releases on Steam and took first place among the best free-to-play games of April by the total number of players! It recouped all of its development costs within the first day, an unheard feat:
- The game was launched on Steam April 2, entering on debut the Top 20 most sold and Top 50 most played games.
- The mobile version has already accumulated over $200 million in cumulative all-time bookings, while the PC version is just beginning its journey.
- The peak concurrent Steam users count reached 25,000 players on the first day of release.
- The Steam version of Pixel Gun 3D recouped its PC platform development costs within the first day of release, making 5 times the average daily in-app purchases of the mobile version.
- The results were achieved without significant marketing investments, capitalizing on strong brand awareness across the globe.
- 24k reviews on Steam estimating about 630k to 1.20m owners as of may 14th
- The average session duration for Pixel Gun 3D on PC is an impressive 70 minutes per day, which is 3.5 times longer than on mobile devices!
- The retention rate on the first day is 30% higher than in the mobile version. What a result!
Island Hopper and Block City Wars are upcoming blockbusters
Highlights of Island Hopper:
- The game has made $47 million in revenue
- Over 20 million downloads to date
- Top 10 Farming Category free games (according to AppMagic data)
- Soft launched in 2021 with a global release late in 2023
There’s so much to do in this adventure game that features Emily, a distraught sister who sailed all the way to a mysterious island in search of her brother. Besides cultivating crops, you can take part in several minigames, go on thrilling camping trips, look for hidden treasures, and even try to uncover secrets of the island’s past. You will never run short of activities in Island Hoppers.
What is Block City Wars?
It’s a reboot of the game Block City, originally released in 2016, a GTA-style open-world shooter in minecraft style for mobile platforms. This year, GDEV decided to completely overhaul the game, using all the experience gained from Pixel Gun 3D to turn Block City Wars into a world-class game. Combining a brand new approach to game design with familiar elements that made the original game popular, Block City Wars has made it into the top 10 best Roblox-like games according to PocketGamer!
First quarter 2024 highlights
- Revenue of $107 million decreased by 10% year-over-year.
- Bookings of $109 million increased by 4% year-over-year.
- Second consecutive quarter of bookings growth.
- Loss for the period of $1 million in Q1 2024 vs. loss of $8 million in Q1 2023.
- $129 million of available cash funds.
- Record high audience expansion due to marketing efficiency
- Share of PC platform increased to 38%
- Blended platform commission expense decreased to a historically low level of 21.9%
- 14 million Monthly Active Users (MAU) +17% year-over-year
- Adjusted EBITDA of negative $3 million in the first quarter 2024 compared to negative $12 million in the first quarter of 2023.
GDEV continues to fire on all cylinders. Q1 2024 represents the second quarter of impressive bookings growth, the main metric to follow. Lots of people still think that revenue is the most important metric in any business. for online service, the most important is bookings.
For example you purchase an annual Microsoft Office subscription in a midyear. Microsoft includes half of this subscription payment as the revenue for this year and second half for the next year, but as a booking this payment will be reflected as a full cash inflow to the account.
In mobile/online games revenue is based on the distance the player stays in the game, that's why cash inflows or bookings are more relevant to assess the company as it's not tied with time and shows the real figures.
It's important to know that EBITDA is generally designed to show the real profit of a company. By default, high EBITDA margins mean that a business can generate a lot of income from the revenue it makes, but in a free-to-play (F2P) model of the gaming industry there are several interesting nuances.
- Revenue: If a generous player pays say $1000 in a game today, you cannot recognize this money as revenue immediately, it has to be recognized gradually.
- Marketing Costs: for gaming companies marketing expenses are not just costs but investments. if a company sees an opportunity to invest more money in marketing today, it ensures revenue streams for long periods ahead, therefore significant marketing expenditures are good.
A quite successful mobile gaming company may see great potential in investing money in marketing, but revenue is recognized gradually while expenses are recognized immediately. As a result EBITDA is in the negative, but the company is in a positive position.
Total addressable market
Cantor expects the global video game market revenue growth to reaccelerate in 2025 onwards to mid-single-digit growth, with 2024 being a year of stabilisation as companies focus on restructuring their cost base after years of over-investments. They see 2025 as a stronger year in terms of new large AAA releases including GrandTheftAuto VI and new hardware launches. mobile seems to be nearing a bottom, with market data and quarterly reports from listed companies looking more positive and suggesting that market growth is resuming in 2024 before improving in 2025.
The 2% decline in the mobile games market in 2023 is an improvement from the 5% decline in 2022. encouragingly, the US was flat in 2023 and 65% of the top 20 markets were flat to very modestly up in the year, prepping for a more bullish set-up in 2025.
According to Sensor Tower’s Q1 2024 Digital Market Index, quarterly mobile game spend surpassed $20 billion for the first time in two years — it reached $20.3 billion, up 2.9% year-over-year. Player spending on iOS grew nearly 6% year-over-year to $13 billion, while consumer spend on Google Play slightly declined to $7.3 billion (-1.3%).
Concluding remarks
GDEV is a great company with solid financials and a bright future trading at ridiculously cheap bargain prices of 2$ at a valuation of 4x EV/EBITDA (peers 12x) and 0.5x EV/Sales (peers 1.5x) with insiders having skin in the game. The company is critically underfollowed, so I would keep a close eye on the company given the strong Q1 2024 and bouncing back into growth mode.
ffs, what strike and expiry?