Our top-pick G5 Entertainment has performed handsomely during recent weeks as the market is finally adjusting its valuation to the company’s 2012 earnings guidance. Despite the year-to-date run of currently 105%, the share is now valued at a 12-months forward PE-ratio of 13.8x, in-line with the levels seen 12-months ago. So yes, the share has doubled but so have the company’s earnings targets. G5 Entertainment is building a strong track-record and is set to publish more than twice the amount of games for iOS, Android and Mac in 2012 compared with 2011. Furthermore, the underlying market for apps is growing explosively as smartphones and tablets are conquering the world. Note that G5 benefits from all growth in these segments, no matter if Apple, Samsung or others are gaining market share in the device markets. So G5’s growth comes from two sources: 1.) underlying market growth of smartphones and tablets and 2.) G5’s expansion of its own gaming portfolio. A sweet spot indeed.
All in all, we are not so much surprised by the strong share price performance recently but rather that it took so long until the market looked at 2012, rather than the past. We at Nordic Investor like to look ahead and I am quoting Warren Buffet and here “skate to where the puck’s going to be, not to where it has been”. In the case of G5, we think this implies to look at the potential beyond 2012, because frankly said: growth will not stop at the end of 2012 (despite the predictions in the Maya calendar). By no means, do we think that a 12-months PE-ratio of 14x is sufficient for a company that is active in the mobile gaming market and that has a proven track-record of leveraging that growth in such an impressive way as G5 Entertainment.
This story is far from over. We have come to a level that is in-line with last year’s valuation. Since then, G5 has become a better and bigger company. Its perceived “Russia”-risk has decreased by the investment of the Swedish company Traction and its future looks brighter than ever. Will the share price stop at these levels? By no means. Naturally, we will sooner or later see a time of share price consolidation but it’s impossible to predict if this will happen South or North of SEK 50. Mid-to long-term, the potential is certainly much higher. We still argue that a potential hostile bid is around the corner and even if management would decide to not accept it at this stage, such a bid would still send shares higher even further as it would cristalize the value of the company.
I am long G5 Entertainment and you should be too!