We hate to say it: 2013 has been a lost year for G5 Entertainment and its shareholder. Admittedly, the year is not over yet and the all important Christmas season is still ahead of us. However, it seems almost impossible that this could make up for developments during 2013.
G5 Entertainment’s share price is down 38% year-to-date and a whopping 47% from its high in July 2013. In a year when markets around the world are marking new all-time-highs this is all the more terrible. While we do see this kind of share price slaughter as exaggerated, it is unfortunately understandable to some extent. A combination of operational but also managerial issues have caused investors to lose faith in the G5 case. For longer term investors, this could provide an interesting entry point to a growth story that is certainly not over yet.
The app market has changed significantly over the last 12 months. The change has caused some of the beauty of the G5 case to disappear. Previously, it was enough to publish reasonable games at a low cost and they would still generate reasonable revenue. The risk was low and so were the cost. Today, the situation has become more and more like the traditional PC/console games market: Developers have to put a lot of resources into development and are highly dependent on the success of these few titles. The big money is earned in the top 10, max top 30 grossing ranks. They are dominated by “the big guys”, who put a lot of money into development and also marketing of these games. G5 is not really present here, with the sporadic exception of its hit game Secret Society. The company has therefore decided to shift is business model more and more towards F2P games, which promise a better long-term monetization but which are also more expensive and increasing the risk for the company. The shift has caused growth to decline during the year. Naturally, it is very hard to navigate in such a fast changing market like the app market, which was not even existing before 2009. Management seems on top of things and has reacted accordingly, but these changes obviously take time. So much to the operational side of things.
To make things worse in terms of investor confidence, the relisting to Nasdaq OMX is taking far longer time than what at least had hoped for. Unfortunately, management is not communicating what it is that is still missing in the process. Like we have stated in a previous article, all obvious criteria are met which leaves the feeling that there might be some internal structures that Nasdaq OMX is not entirely happy with yet. The Nasdaq OMX listing committee had its latest meeting last week and given the lack of notice from the company, we have to assume that the relisting will have to wait until 2014. This is a great disappointment to many and probably also the reason for the further sell-off since last week.
What is needed is some positive news in any form. The recent insider buying of the Chairman Petter Nylander was overshadowed by the lack of news on the relisting but it was a step in the right direction. We would appreciate to see more insider buying to show that management and the Board are believing in the case. It is also essential that G5 publishes a new F2P title sooner rather than later. F2P tend to have a longer start-up period in terms of monetization as they are free to play at the beginning and only gradually encouraging the players to pay. It remains to be seen how the existing F2P titles can perform during the all important holiday season. So far, only Secret Society is really worth mentioning. Virtual City Playground is clearly beyond its peak and Brave Tribe and Stand o Food Empire need some serious campaigns and updates to climb the ranking ladder.
It’s always darkest before dawn
At this point, a lot of bad news is priced into the share. Q3 2013 is likely to have been the low point of 2013 as G5 starts to go out of its transitional period towards more F2P focus. With all the new F2P titles coming up, it does not seem unlikely that at least one of these new and upcoming titles will be at least as successful as Secret Society, meaning annual sales of SEK 200m as a first step and the mid-term SEK 300m (management’s goal) are still within reach. It has, however, become much more unpredictable than in the past. Growth in the overall app market is still rapid, driven by underlying growth in the device market (smartphones and tablets). At current levels, one could also imagine that G5 has become a more interesting takeover target again.
There will be positive news again. Make to sure to stick around long enough to reap the benefits.
Tags: analysis, casual games, electronic arts, equities, equity research, G5 Entertainment, Gameloft, Glu Mobile, google play, investing, investment, King.com, m&a, mobile gaming, Rovio, stock market, zynga