The trend is your friend – in this case if you are an app developer focused on mobile gaming that is.
I have been looking at the search volume on Google for several key words related to apps and mobile gaming such as “Games Ipad”, “Games Iphone”, “Games Android”, “App store” and “Android markets”. As you can see in the chart below (source Google Trends), search volumes for all these key words are trending up, i.e. there are more people “googling” for these key words today compared with the average over the last 12-months. I think it is also interesting to highlight that the X-mas period has been by far the busiest period over the last 12 months, so the best time of the year lies still ahead of us. This should bode well for download activity for the mobile gaming companies such as Glu Mobile and G5 Entertainment in the weeks and months ahead.
According to an article in Financial Times Deutschland, gaming company Zynga is likely to make its highly anticipated debut on the stock market before Thanksgiving (November 24th).
The company is said to investigate a reasonable share price level for its issue. According to previous information earlier this year the valuation could be somewhere between USD 15 and USD 20bn. A $15 billion valuation would mean Zynga is worth 23 times its projected 2011 earnings, which is not unreasonable for such a fast-growing company. Even at $20 billion, the company would be worth “only” 31 times 2011 earnings, which would be high for a mature company with slower growth, but is still reasonable for a fast grower like Zynga.
In March 2011, Zynga was projecting a 2011 profit of $630 million on revenue of $1.8 billion, according to a New York Post report that cited a prospective investor who had seen Zynga’s financials. Zynga makes money by selling virtual currency for use in its games. Users pay to replenish their “energy,” which allows them to participate more fully in games. The company has about 250 million users.
The IPO could potentially turn investor focus towards internet gaming and mobile gaming companies such as Glu Mobile, Majesco Entertainment but also G5 Entertainment. All of them are currently trading below their highs from earlier this year, despite a business model that is recession proved and positive company specific newsflow. G5 Entertainment in particular has come with an extremely encouraging guidance on 2012 and is currently trading at a 12-months forward looking PE-ratio of 7x.
G5 Entertainment announced this morning that it is teaming up with the developers of HipSoft to bring their “Build-a-lot” franchise to iOS and Android. “Build-a-lot” has been selling over one million copies on PC and spent more than 5840 days in the Top 10 Charts of leading portals. The concept is similar to G5 Entertainments “Virtual City” with more focus on building houses rather than complete cities: gamers can create, upgrade and then sell the houses of their dreams.
Looking on HipSoft’s homepage, the company has so far published 6 different versions of the “Build-a-lot” franchise. The first two of them were ported to iOS by Glu Mobile so if G5 Entertainment was to port all the remaining 4 versions to iPhone, iPad and Android we would see 12 new games to be released only from this co-operation.
Certainly a promising announcement. G5 Entertainment is expanding its network of co-operation partners with a high-calibre addition. From the look of it, HipSoft’s games seem to be perfectly fit for the touchscreens.
Apple just reported its fiscal Q4 numbers and missed analyst expectations for the first time in many years. Q4 revenue came in at USD 28.3bn, compared with expectations of USD 29.7bn and reported EPS of USD 7.05 was below expectations of USD 7.39 per share.
The main reason for the miss was disappointing iPhone sales with 17.1 million units sold, versus consensus of 19 – 20 million units. iPad sales were in-line at 11.1 million units sold.
Boosted by the strong sales start of the new iPhone 4S, Apple is, however, guiding for a strong X-mas quarter projecting revenues of USD 37bn and an EPS of USD 9.30. This compares to analyst expecations of USD 36.6bn and USD 8.98 respectively. This is all the more encouraging as Apple usually guides rather conservatively.
All in all, I’d say no major news for our top-pick G5 Entertainment. Primarily the strong sales start of the iPhone 4S is very promising and bodes well for future app-sales. If we are lucky, Apple will soon add the iPad 3 to its line-up.
A few days ago, G5′s CEO Vladislav Suglobov started to buy some shares again after a pause of almost one year. Considering his overall position of previously 720,000 shares, the latest addition of 1,000 shares seems of course rather negligible. However, I think it is interesting to note that he has in the past acted in a similar way, i.e. buying relatively small positions but on a re-occuring basis.
In July 2010, the CEO increased his position by 1,000 shares. The following month he bought 5,000 shares and he did the same in September and November 2010. As I mentioned in a recent comment, the current valuation of G5 is actually below the levels seen one year ago (during the period when he increased his position). I believe that Vlad is well aware of this fact and I would not be surprised to see his historical buying pattern to be repeated in the coming weeks and months.
For a complete summary of all insider transactions please go to:
Adding to the very encouraging newsflow last week from our top-pick G5 Entertainment, we notice that board member Peter Benson has increased his holding in the company from previously 4,000 shares to now 7,000 shares. I would not be surprised to see additional insider purchases in the near future. The share is simply too cheap.
For a complete summary of all insider transactions please go to:
A little observation on G5 Entertainment’s share price: You can get the share at a cheaper valuation than one year ago.
Exactly one year ago, the G5 share traded at SEK 9.90. On September 21st 2010, management published a first guidance on 2011 EPS of SEK 1.40 per share. That means that one year ago, one could buy G5 at a 12-months forward looking PER of 7.1x.
Yesterday, management gave its first flavor on 2012, guiding for an EPS of SEK 3.20. The share price is trading today at SEK 21.60, implying a 12-months forward looking PER of 6.8x
As a polite reminder: The G5 share more than doubled in the period October 2010 until February 2011…
One day later than from us expected, G5 Entertainment released this morning its Q3 update and more importantly gave a first guidance for 2012.
The company says: “ The management announces that the group’s goal for year 2012 is 87 MKr revenue with 30 MKr operating result and EPS of 3.2 Kr. ”
EPS of SEK 3.20 next year implies earnings growth of 70% for 2012 versus 2011. G5 continues to grow fast and with stellar profitability. Revenues of SEK 87m would imply growth of 85% compared with expected 2011 levels of SEK 47m and at SEK 30m, the implied EBIT margin is 34.5% for next year (which compares to the expected 2011 level of 35%). Elsewhere, the company left the forecast for 2011 unchanged.
There are several things I’d like to comment on regardings today’s press release:
- It seems as if management sticks to its strategy to ramp up marketing and developing capacity during H2 2011 which implies increased costs in the short run. FY 2011 earnings guidance is therefore unchanged and the company is preparing for a strong 2012 to come.
- I am very pleased by the EBIT margin guidance of 34.5% for 2012, i.e. almost at the same level as for 2011. This shows that G5 does manage to keep comparable margins in its business when porting other developers games to iOS and Android compared to developing own games. CEO Suglobov has been stating this in the past but it is encouraging to get some numbers on it as well.
- The SEK 3.20 EPS guidance implies a continued low tax rate of around 15%. In our most recent Nordic Investor comment “2012 estimates” we used a more normal tax rate for Sweden of some 26%.
- Revenues of SEK 87m is in our opinion a good proof that G5 management continues to be conservative, as it has been in the past. While this would be an increase of 85% year-over-year, it would not take more than 120 new games and comparable average selling rates as in 2011 to reach that number (for my complete reasoning on this issue please see our comment from September 24th “2012 estimtates”). This can be achieved by publishing only one game per current partner studio on the iPhone, iPad, Mac and Android (i.e. 4 platforms) plus an additional 5 games on their own on all of these 4 plattforms. My guess is that we will see more than 25 partner studios towards the end of 2011… If we assume 30 partner studios publishing 1 game on 4 platforms plus 5 own games on 4 platforms and at the same time use an average download ratio per games which is almost 10% below 2011 levels, I get to a revenue number of SEK 99.5m. Applying the guided EBIT margin of 34.5% and the tax rate of 15%, the corresponding EPS would be SEK 3.65 per share
G5 Entertainment is a great company with experienced management and the financial means to capture the opportunities they have in the fast growing mobile gaming market. I have no doubt that the company will achieve the SEK 3.20 per share next year, in fact, I am convinced it will be more than that! While I am writing this, the share is trading at SEK 22,00 implying a PER of 11.6x on 2011 earnings and a PER of 6.9x on 2012 earnings. Now, 2011 is almost over and the market is always forward looking so one can wonder how reasonable a PER of 6.9x is for a company that expects to grow its EPS by 70% next year. There might several shares these days that got beaten up and are trading at PER around 10 and below but how many of those are growing so fast? PER should always be seen in relation to the earnings growth rate.
G5 Entertainment is undervalued at these levels; nothing to argue about. Given the new guidance of SEK 3.20 per share, the share should trade at at least SEK 32. Given the fast growth a PER of 15x should be more realistic despite the fact that the general risk premium in the equity market has been increased over the last weeks and months. 15 times 3.2 is SEK 48!
Congratulations to all of you who are shareholders in this beauty!