Remedy Entertainment might be the next Supercell (the private games company sold to Tencent and now worth over $10 billion). Comparisons can also be made with Small Giant Games (SGG), another private developer which sold 80% to Zynga in 2018 for $330 million cash plus $230 million in Zynga stock.
Over the next three years the rest of Small Giant Games, or 6.6% per year to be more accurate, was bought by Zynga; depending how much SGG makes – 2019 was potentially worth $122 million USD to the company.
Gaming company Small Giant Games has disclosed its first full annual turnover since it was sold to Zynga in 2018, which rose from €165 million to €329 million euro. It effectively doubled its turnover in a year. The profit was even more phenomenal, at €109.8 million.
Small Giant Games is extremely profitable. It is almost as profitable at 33.4% Supercell (35.1%), the most profitable mobile game company in the world.
Remedy Entertainment has shrugged off the COVID crisis
Remedy Entertainment CEO Tero Virtala has worked for over 20 years in the gaming industry and recently stated in an interview in Finnish Kauppalehti that things have never been as good for Remedy Entertainment. The stock price has fared very well during the Covid-19 crisis, rising to an all time high on Tuesday June 23rd. Priced at €23.6 the 52 week range is €8.58 to €23.6. The current market cap is roughly €270 million. The P/E is high at 69, but factor in growth of over 100% this year and it is less of a problem.
The Armchair Trader first started following Remedy Entertainment on 27 January, when the share price was just under the €15 mark. At the time of writing it was trading at over €22, having surged back from the dip in March.
Pure play listed gaming stocks are a rarity – we have seen how quick developers like these get snapped up. As we saw with Supercell or Small Giant Games, they rarely come close to public markets.
Virtala states that sadly there are only 30-40 private gaming studios left from 150-200 a decade ago; most have been bought by bigger players like EA, Microsoft, Tencent, Epic Games and others. Virtala was previously CEO and owner of Redlynx, which was bought by French company Ubisoft in 2011.
How developers get room to breathe with Zynga
Timo Soininen, founder of Small Giant Games, has said their hit Empires & Puzzles game was the main reason Zynga bought the company. He has been very happy with the new Zynga ownership.
Zynga has bought companies or gaming studios and allowed them to act independently under Zynga ownership and develop games like they are used to. The synergies come from larger parent group. The real driver for profitability is that games can be popular hits for years. The the cash flow can be very lucrative, because the main development costs have been paid already.
- Redmayne Bentley: our 2021 global market outlook (23 Dec 2020)
- A fund that is reshaping how we think about emerging markets (14 Oct 2019)
- Can Activision Blizzard stock get back in the game in 2019? (10 Oct 2019)
Most lucrative games just do not make money from up front purchases. Games can be distributed cheaply via digital install rather than manually via shops, but also you can buy add-ons when you play the game. This is frequently where developers make the real money, after the project has been completed, sometimes years afterwards.
Playstation 5 is coming
PlayStation 5 is coming this Christmas. Its launch will see the upgrade of many popular game titles and their followers or friends. The year 2020 is the year for gaming.
Most gaming studios also have few employees – for example 52 in Small Giant Games; turnover per employee can be as high 6.3 million euro, in the case of SGG. When you pay on average €132,200 euros per employee, every employee is still making a profit of €2,1 million each for the company.
When it comes to the digital game space, we think Zynga is a great stock too, but Tencent is far more diversified, including owning 40% of privately held Epic Games.