Starbreeze: Motivated relief rally
Research Update
2024-05-15
07:35
Redeye provides an research update following Starbreeze Q1-report; Some positive comments from management regarding an at least minor comeback for Payday 3 during the second quarter and stronger sales yet another quarter create some optimism for the future. Its third-party publishing business, led by the game Roboquest, also continues to add some optionality.
Tomas Otterbeck
John Westborg
Starbreeze's revenues exceeded our expectations for the quarter by 53%. At the same time, EBIT was in line with our expectations, due to a higher depreciation rate of Payday 3 and a one-time expense related to the employee incentive program linked to the launch of Payday 3. Nevertheless, cash flow remained strong, resulting in a cash position of SEK387m at the end of the quarter compared to SEK348m the quarter before.
We continue to have relatively conservative sales estimates for Payday 3 despite another strong quarter that exceeded our expectations. Management was clear about its sales expectations both in the CEO statement and in the earnings call; Payday 3 will perform better in H2. However, we have lowered our Q2 estimates for conservative reasons and the fact that the next DLC has been delayed from spring to summer.
Before the Q1-result was announced the Starbreeze-stock was traded with a negative enterprise value (EV). Meaning the cash position and net debt was higher than the market cap. The motivated stock surge almost 20% on the report day the market cap is around SEK400m. We still believe the valuation of Starbreeze is too low, and that the company is a takeover target. Our fair value range is unchanged at SEK0.35-1.2 per share with a base case of SEK0.7 per share.
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
| Total Revenue | 122.5 | 633.5 | 190.1 | 174.8 | 720.8 |
| Revenue Growth | -2.6% | 417% | -70.0% | -8.1% | 312% |
| EBITDA | 66.3 | 441.7 | 78.0 | 49.5 | 516.2 |
| EBIT | 6.7 | 190.4 | -50.8 | -30.5 | 220.9 |
| EBIT Margin | 5.5% | 30.0% | -26.7% | -17.5% | 30.6% |
| Net Income | -54.7 | 154.2 | -45.9 | -22.5 | 232.9 |
| EV/Sales | 9.8 | 1.6 | 4.7 | 6.0 | 0.9 |
| EV/EBIT | 179 | 5.5 | -17.4 | -34.1 | 3.1 |
Case
Masters of “Games as a Service”
Starbreeze has shown that the company can create recurring revenue from a loyal fanbase for a long period of time twice, both with Payday 2 and through the publishing success Dead by Daylight. With the release of the much awaited Payday 3, ten years after its forerunner, Starbreeze has a good chance to continue the successful journey with the Payday-franchise. Starbreeze has also started initiatives to develop a new game planned to be released in 2025/2026 and re-launched its publishing unit.
Evidence
Game launch is only the beginning
Payday 2 has generated net revenues of more than SEK1.3b to Starbreeze in ten years. An interesting aspect is that Payday 2 brought in “only” SEK120m in net income during the initial period after launch (in this case four and a half months) which shows how well Starbreeze manages the business model “Game as a Service”. Payday 3 has shown a major negative trend in engagement since its opening week, but so did Payday 2. We expect that the engagement will come back like last time, when new content has been launched.
Challenge
Key personnel have left the building
The success of Payday 3 ultimately is decided by the quality of the game, and how well it manages to serve loyal fans as well as create new ones the next-coming years. We would of course be more confident in the long-term quality assurance if more original creators (of Payday 1 and 2) were still operative in the company such as key game designer Ulf Andersson.
Challenge
A somewhat weak ownership
Starbreeze has no active major shareholders. Due to very bad risk management historically that ended in reconstruction in 2018, no founders, active personnel, or manager of the board have a significant shareholding. This, of course, weakens the incentives in the company to build great shareholder value.
Valuation
High dependence on one game launch
Starbreeze financial postition is strong after the succesful rights issue in june 2023 and the strong initial sales from Payday 3 of close to SEK500m. We expect a net cash position in Starbreeze of roughly SEK400m at the end of 2024. This is a major contrast to the SEK380m in debt Starbreeze had at the year-end of 2022. We assume Starbreeze is likely a takeover target.
Disclosures and disclaimers