The underlying app market has developed impressively in 2014 so far and continues to do so. Revenues generated by mobile games have continued to increase well through the whole of Q2 and early Q3 so far. As a proxy, we are tracking daily revenues generated for iPhone games in the USA, as provided by www.thinkgaming.com. As you can see in the chart below, there has been a gradual increase of the daily revenues generated ever since the beginning of December.
In early July, Sweden listed mobile gaming developer and publisher G5 Entertainment, announced its preliminary Q2 2014 revenue numbers which indicate a year-over-year increase of more than 80%. That is an impressive number indeed and mainly related to the rather constant performance of its blockbuster game Secret Society, which ranks around number 35 in the US top grossing iPad games charts. With the increase in the underlying market continuing, changes are high that Secret Society will generated higher sales as the year progresses.
By simply extrapolating the preliminary Q2 numbers, we would end up with 2014 revenues of SEK 160m, which would imply an increase of 60% compared with 2013. However, for the reasons mentioned above, we believe H2 will look even better than H1, i.e. 2014 revenue could end up above SEK 160m.
The big question mark remains the EBIT margin. Only recently, management its target of around 30%, which looks ambituous from the current position and can be compared with Q1 2014 EBIT margin of 13%. Given the scalability of G5’s business model, we believe that 30% do not seem to be out of reach as the underlying market grows without necessarily asking for higher investments from G5’s side.
We find it interesting to note that one year ago, G5 Entertainment’s share price was around SEK 50, i.e. almost 50% above today’s levels. Since then, the company has successfully shifted its focus to free-to-play games, a segment which is growing impressively and G5 Entertainment has just reported preliminary sales numbers which are more than 80% above the levels seen one year ago.
Sales up 80% – share price down 50%….
We believe that the recent relisting to Nasdaq OMX will lead to increased institutional investments in G5 once the positive operational development has proven to be sustainable.
Follow the latest buzz around G5 Entertainment at www.buzztrader.se. G5 Entertainment is part of the Nordic Investor BuzzTrader portfolio.