G5 Entertainment published its annual report today and I thought I’d post CEO Vlad Suglobov’s letter to the shareholders as a nice Tuesday morning reading:
In 2011, G5 continued to grow as publisher and developer of games for smartphones and tablets. Global smartphone and tablet shipments already overtook PC and laptop shipments in 2011, and analysts forecast that by 2013 the difference in shipments will be two-fold, and by 2020, there will be over 10 billion mobile connected devices on the planet, while the market of apps for these devices will reach $25 billion in 2015 from $6.8 billion in 2010. The growth is worldwide, with US leading the market since 2009, while Europe and Asia are quickly catching up.
G5 debuted on this expanding market in 2009, starting with the Supermarket Mania game for iPhone and subsequently releasing well over 100 games for Apple‟s iPhone and iPad, Google Android phones and tablets, Amazon Kindle, Barnes&Noble Nook, and other devices of the “post-PC era”, as present time is now called in the technology world. The number of downloads of G5‟s games increased five-fold from 2010 to 2011, and recently surpassed 50 million.
In 2011, G5 successfully debuted in free-to-play games with Virtual City Playground. This city simulation game can be downloaded for free, but provides the ability to purchase certain virtual goods, and many players choose to do so. This business model originally came from Asia and provides advantages in monetization compared to downloadable games. G5 plans to extend its offering in free-to-play games during 2012 and further.
In the market of games for smartphones and tablets, monetization through in-app purchases is prevalent now. By some estimates, in-app purchases accounted for over 70% of the App Store revenue in 2011. G5 is riding this trend. Already over 40% of the group‟s revenue in 2011 came from in-app purchases, and the ratio is expected to rise further in 2012.
G5‟s customer base and the ability to market games attracted tens of development studios from around the world that now work with G5 as a publisher on revenue share terms. During 2011, G5 further strengthened its developer network and has over 50 games in the pipeline for release during 2012. Still, the group‟s own games like Virtual City, Special Enquiry Detail, Supermarket Mania, Stand O’Food, and others continue generating the major part of the group‟s revenue.
The market of games for smartphones and tablets is forecasted to grow by leaps and bounds for at least several more years. This is why as G5 continues profitable growth in 2012, the management chooses to reinvest the profits in the licensing and development of new products, exploring new monetization models, and conquering new geographical markets and new technology platforms, with the goal to secure and improve the group‟s position in the market and maintain high pace of growth. The journey is only beginning.”
In the meantime, the G5 share continues to perform poorly. Given the uncertain macroeconomic situation and the general risk aversion this is not surprising, given the small size of the company and its listing on the small Swedish “Aktietorget”-marketplace. It’s a pattern we know all too well from last summer. As we constantly screen in our “ranking checks”, business is going very well for G5 and its rankings are improving steadily, suggesting that the company is actually gaining market share. Interestingly, the G5 share is now trading in-line with the lowest levels seen during last summer as well, at an PE-ratio of just below 11x.
Investing in stocks requires patience and good nerves at times, but it can be highly rewarding if you do your homework. We think the current share price weakness is a very interesting entry opportunity. The G5 share is currently the cheapest it has been since late 2010: