in Mobile Gaming

G5 Entertainment: Huge long-term potential as tablet and smartphone growth continues

Global tablet sales reached 67 million units in 2011 and are expected to grow 38.8% annually to 248.6 million by the end of 2015, according to a new market report from Transparency Market Research. This reports www.bgr.com today.

Led by Apple’s iPad, tablet sales increased 275.5% in 2011 from 17.8 million units sold in 2010. Smartphone sales in 2011 hit 468.9 million units, a 66.7% increase over 2010 sales of 282 million units, and sales are expected to reach 1.05 billion in 2015 with Asia accounting for 39.5% of the market. Smartphone sales in the fourth quarter of 2011 beat the combined sales from the full year of 2008, the report notes. The leap in sales was largely driven by consumer and enterprise adoption of the iPhone 4S, which shipped more than 36 million units in the quarter.

Global Tablet sales to end users reached 67.0 million units in 2011 and is expected to reach 248.6 million units by the end of 2015, growing at a CAGR of 38.8% from 2011 to 2015. Asia – Pacific (including Japan) is expected to enjoy the highest share of overall global shipments and end user sales of Tablets at 36.1% and 35.3% respectively in 2015.

In 2011, Smartphone sales to end users reached 469.9 million units, registering a growth of 66.7% over 2010 sales of 282.0 million units. The Smartphone sales to end user are expected to reach 1,048.0 million units by 2015 with Asia – Pacific accounting for the largest market share at 39.5%. Asia Pacific is also expected to enjoy the highest growth rate at a CAGR of 36.3% from 2010 to 2015. (Browse the database at http://www.transparencymarketresearch.com/tablet-and-smartphones-market.html)

In the light of studies like this, we find it more and more reasonable to believe in an ongoing structural growth of the app market as well. The best exposure a stock market investor can get to the app market is G5 Entertainment, which is almost a 100% play on iOS and Android games. Its growth track record is magnificent and the company is targeting topline growth of more than 80% for 2012 versus 2011. Not only is G5 Entertainment benefitting from the growth in the tablet and smartphone markets, but it is also growing organically, i.e. it is aggressively increasing its game portfolio. CEO Vlad Suglobov has previously envisaged the mid-term goal of reaching revenues of SEK 300m and an EBIT of SEK 100m.  If the company can manage to capture the growth opportunities going forward as well as it has done in the past, these goals could almost be reached by the end of 2014. What this would mean for the share price is best shown with a back-on-the-envelope calculation:

  • The market is currently valuing G5 Entertainment at a 12m-forward PE-ratio of 14x.
  • In order to arrive at an implied EPS under the “mid-term scenario” (i.e. revenues of SEK 300m and an EBIT of  SEK 100m), we make the following assumptions: a) a financial net of zero, which is conservative since G5 Entertainment has actually a net cash position and b) a tax rate of 15%, i.e. in-line with current levels. This leads us to a net profit of SEK 85m under the “mid-term scenario”, which implies an EPS of SEK 10.6
  • Applying the same 12m-forward PE-ratio than today, this would mean that the G5 Entertainment share should trade at close to SEK 150 at the beginning of 2014, i.e. in two years time.

We are not suggesting that the G5 share should necessarily trade at SEK 150 today, but the example above shows that such levels are clearly achievable within a reasonable timeframe. Interestingly, at SEK 150 we are still using a PE-ratio of only 14x, which seems hardly fair for a fast growing, profitable company.  If the mid-term scenario was to materialize we expect the market to be willing to pay higher multiples by then. A PE-ratio of 20x would imply a fair share price of around SEK 210 by 2014.

2012 has been very pleasant for G5 Entertainment shareholders so far and we are convinced that the best is yet to come.

Nordic Investor


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3 Comments

  1. Chris February 10, 2012 Reply
  2. alexus February 14, 2012 Reply

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