Gravity: Mobile Games, International Expansion, NBA License, And Cheap (NASDAQ:GRVY)

Gravity Co., Ltd. (NASDAQ:GRVY), the developer of the well-known and profitable Ragnarok recreation, not too long ago launched a lot of new cellular video games, which can speed up free money move progress within the coming years. The corporate is signing new license agreements like that with the NBA, and stories a considerable amount of money in hand, which may very well be helpful for future developments. For my part, growth into new territories, new partnerships, and acquisition agreements with native rivals might carry a big variety of new worldwide customers. I don’t see why the corporate trades on the present degree given ongoing free money move progress and internet revenue progress. For my part, the GRVY is sort of undervalued.

GRVY

Gravity presents itself as an internet and cellular video games developer and writer from Korea. It’s producing income all around the world in near 91 markets.

The corporate receives charges or royalty funds coming from subscription charges and micro transactions of the sport in overseas jurisdictions. Ragnarok and its a number of variations are accountable for a big a part of the whole income. The sport is a well known previous timer within the gaming trade, as Ragnarok On-line was first commercially launched in August 2002.

Our principal cellular video games, Ragnarok Origin, Ragnarok X: Subsequent Era and Ragnarok M: Everlasting Love accounted for 62.3%, 13.7% and 9.6%, respectively, of our complete revenues for the yr ended December 31, 2023. Supply: 20-F

Within the final quarter, the corporate reported a big lower in internet income, which I didn’t like. With that, I feel that Gravity is an efficient long-term funding. Traders could need to have a look at the financials reported within the final ten years.

Complete revenues have been KRW 122,967 million (US$ 89,330 thousand), representing a 2.7% improve from the primary quarter ended March 31, 2024 and a 48.5% lower from the second quarter ended June 30, 2023. Supply: Quarterly Press Launch

First Assumption: Cell Video games Might Improve The Consumer Base

Even contemplating that most of the players who first performed Ragnarok will not be children anymore, the corporate continues to make a big amount of cash. I do suppose that the video games provided by GRVY are in style even after twenty years of launching. Peak concurrent customers and common concurrent customers related to Ragnarok On-line decreased in 2023 as a result of players are shifting to cellular video games. On this regard, it’s value noting that GRVY is investing some huge cash in cellular recreation growth. In a latest commentary given by administration, the corporate seems to assert that cellular video games might carry a bigger goal market.

We consider that cellular video games, because of such traits, present much less‑skilled customers with a method to change into aware of each recreation taking part in and the sport tradition with out making a considerable dedication in time and assets. Because of this, we consider that cellular video games permit us to focus on a broader viewers of customers. Supply: 20-F

It’s fairly helpful that GRVY seems to earn money sooner due to cellular video games. The event of cellular video games seems sooner, and the life cycle can be shorter. A major a part of the income from cellular video games comes within the first 12 months after launch. The variety of cellular video games launched in 2023 and 2024 is sort of important, so I might count on a considerable amount of income progress within the coming quarters.

In distinction to on-line video games, the life cycle of a cellular recreation is comparatively quick, and usually lasts from six to 24 months, whereas reaching its peak recognition throughout the first three months of its introduction, although it varies by style. Supply: 20-F

Second Assumption: New Video games Might Carry Important Income Development

Given the whole amount of money that GRVY has within the stability sheet and the know-how gathered within the gaming trade, in my opinion, GRVY is in a superb place to develop profitable new video games. On this regard, it’s value mentioning the agreements signed with the NBA to develop new video games. I feel that any effort to diversify the forms of video games provided will most certainly be appreciated by market members. The significance of Ragnarok seems to be of appreciable measurement.

We entered into an settlement with the NBA and NBPA to acquire the proper to develop and publish an NBA licensed recreation. Supply: 20-F

Third Assumption: New Markets Might Speed up Web Gross sales Development

Most of the firm’s video games will not be current in jurisdictions, which might carry important players base. The corporate makes some huge cash in Asian nations like Taiwan, Korea, Indonesia, and Japan. For my part, enough advertising and marketing efforts to enter new markets in Europe, China, South America, or Africa might carry important income progress. Apart from, with many a long time within the trade and money in hand, in my opinion, the corporate might purchase a competitor in a brand new area, and work collectively to adapt the corporate’s current video games to the brand new jurisdiction. Because of this, I feel that the corporate’s internet gross sales progress might speed up.

Latest Will increase In Web Earnings And FCF Development Point out Profitable Efficiency

I took a have a look at the monetary statements reported within the final ten years to grasp whether or not the corporate is worthwhile. It’s fairly spectacular that the web revenue, the money revenue tax paid, and the unlevered free money move grew considerably in the newest enterprise historical past.

Clearly, the brand new video games launched, and current video games are bringing in a big amount of money in hand. Given earlier efficiency and the present amount of money in hand, I assumed that GRVY will proceed to ship FCF era sooner or later.

Important Enhance In The Complete Quantity Of Money, Complete Property, And Complete Liquidity

The monetary statements reported for the final ten years point out important enterprise progress. The money in hand, the whole quantity of property, and the whole quantity of fairness elevated considerably. For my part, additional improve within the complete quantity of fairness might result in demand for the inventory and inventory worth enhancements.

Within the final ten years, the guide worth per share additionally elevated considerably, from near $6 per share to greater than $51 per share. The corporate is at the moment buying and selling not removed from the guide worth per share. On this regard, making an allowance for that GRVY does report FCF, the corporate does look fairly undervalued.

My Value Goal, And Friends

My discounted money move mannequin consists of a number of assumptions in regards to the future. First, I took into consideration profitable growth of latest cellular video games in addition to profitable growth of latest variations of Ragnarok.

As well as, I assumed that new license agreements like that signed with the NBA and others, in addition to agreements with third-part builders, might carry new free money move progress. Lastly, I took into consideration potential growth into new territories due to M&A transactions.

The free money move progress that, I assumed, is just about in step with the free money move seen within the final ten years. I assumed FCF near $58 million and $71 million, a WACC of 9%, and a conservative terminal EV/FCF of 5x. My outcomes included an fairness valuation of $848 million and a good worth near $123 per share.

NPV of FCF: $328.11 million NPV of TV: $157.07 million Complete EV: $485.18 million Web Debt: -$363 million Fairness: $848.18 million Shares Excellent: 6.9 million Goal Value: $122.92

Different rivals additionally present an Ev/TTM EBITDA ratio, which is considerably greater than that of GRVY. GRVY seems to commerce at 1x TTM EBITDA. Different friends commerce at near 14x, 6x, and 5x.

GRVY’s Ev/ TTM Gross sales, and Value/Ebook are additionally fairly low as in comparison with that of rivals. In sum, the corporate is sort of low cost.

In 2024, a big variety of institutional traders purchased shares. Based on YCharts, the institutional traders possession share elevated considerably. For my part, I’m not the primary particular person on the market, who believes that the inventory is a good suggestion.

Dangers From Alternate Price Of Overseas Currencies And The USD

The corporate receives a big a part of its income in nations in Asia. For my part, a rise within the worth of the USA greenback as in comparison with the currencies of Indonesia, Taiwan, Korea, Japan, or the Philippines may very well be very detrimental for traders in the USA. Because of this, even when the video games are profitable, the stability sheet and future free money move could also be value much less due to the energy of the USA greenback.

In many of the nations through which our video games are distributed, the revenues generated by our abroad subsidiaries and licensees are denominated in native currencies, which embrace the NT greenback, the Thai Baht, the U.S. Greenback, the Japanese Yen, and the Philippine Peso. The revenues from these nations, aside from the USA, Japan, and European nations, are transformed into the U.S. greenback for remittance of month-to-month royalty funds to us. Supply: 20-F

Dangers From A Lower In The Quantity Of Avid gamers

Ragnarok On-line seems to have reached maturity in most of the markets the place the corporate is current. New enhancements in Ragnarok On-line could not carry new players. Because of this, the variety of customers might decline, which can result in a lower within the income and free money move margin. It seems very clear that the corporate continues to launch new video games, primarily cellular video games, which might carry important internet gross sales progress sooner or later. With that, launching new video games includes many dangers. GRVY could by no means develop new video games as profitable as Ragnarok On-line.

Ragnarok On-line has been available on the market for 22 years and has reached maturity in most of our principal markets. Supply: 20-F

Dangers From Income-sharing Preparations

To be able to commercialize the corporate’s cellular video games, the corporate works with massive technological corporations. It implies that the corporate shares its income with the platforms. Because of this, the revenue margin from the cellular video games developed is smaller than that of on-line video games. Because of this, given the event of latest cellular video games, within the coming years, the corporate’s revenue margin could decrease than that previously. If traders decrease their expectations about future free money move progress, I might count on a decline within the inventory worth.

To be able to achieve entry to our video games on cellular app shops, the first distribution channel for our cellular video games, we should enter into revenue- sharing preparations that lead to decrease revenue margins in contrast with these of our on-line video games. Supply: 20-F

Conclusion

With many a long time within the gaming trade and profitable growth of latest variations of Ragnarok On-line, I count on future internet gross sales progress to proceed within the coming years. The identical groups that designed Ragnarok could carry new worthwhile video games. As well as, given the whole amount of money in hand and know-how, I count on that the brand new cellular video games launched in 2023 and 2024 might speed up FCF progress within the coming years.

Apart from, I feel that the growth into new territories might work if the corporate indicators new partnership agreements, and buys rivals in areas the place the corporate doesn’t function. Know-how from the brand new area from an area associate might assist the corporate provide video games that native players might get pleasure from. With all this being mentioned, I feel that the GRVY seems considerably low cost given the corporate’s ongoing free money move. Different recreation builders commerce at dearer worth marks.