Starbreeze: Initial numbers looks promising
Research Update
2023-08-18
07:30
In one-month Starbreeze will release its most important game to date, Payday 3. The debt-free company has managed to create an impressive hype and the loyal community is optimistic about the upcoming game. We assume Payday 3 will entertain millions of players in the years to come.
Tomas Otterbeck
Viktor Lindström
Net sales of SEK43.2m were clearly above our expectations of SEK33.4m. Profitability metrics such as EBITDA and EBIT were however in line with our estimates due to higher marketing costs than expected. We however argue that those marketing costs were well spent looking at the hype Starbreeze managed to create close to the release of its most important game release to date.
At the beginning of August, a closed beta was released of Payday 3. A respectable number of 880 000 players signed up for the beta testing. The company’s own portal Starbreeze Nebula has reached 1m community members. 1.7 m players have added Payday 3 in its wish list on the leading PC platform Steam. These are all good signals and increase our conviction that Payday 3 will have a commercially succesful release.
Starbreeze is a dedicated game studio with negligible debt, which leads us to believe that it should be traded at higher EBITDA multiples than its considerably less specialized Swedish counterparts in the stock market. In our view, now that the balance sheet is debt-free and the convertible loan to Digital Bros has been resolved, the company is also a more likely acquisition candidate. Based on the estimated results for 2023, Starbreeze appears attractively priced with an EV/EBITDA of 3.5x compared to the median among Nordic companies at an EV/EBITDA of 4.4x. However in 2024, profitability will be much lower according to our projections.
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Total Revenue | 118.0 | 125.7 | 122.5 | 526.6 | 279.3 |
| Revenue Growth | -57.9% | 6.6% | -2.6% | 330% | -47.0% |
| EBITDA | 49.3 | 6.3 | 66.3 | 376.2 | 153.1 |
| EBIT | -16.2 | -53.7 | 6.7 | 283.6 | -2.9 |
| EBIT Margin | -13.7% | -42.7% | 5.5% | 53.9% | -1.0% |
| Net Income | -151.0 | -100.1 | -54.7 | 241.1 | -4.9 |
| EV/Revenue | 8.7 | 8.6 | 9.8 | 1.8 | 3.6 |
| EV/EBIT | -63.4 | -20.1 | 179 | 3.4 | -356 |
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
Payday 3 shapes the future
Payday 3 will be released in 2023. Unlike its predecessor, it will be a multi-platform release which is expected to increase sales. Other significant drivers for higher sales are the brand’s increased strength since 2013, a higher development and marketing budget, and a significantly larger gaming market. When all direct costs are taken, we expect Payday 3 to give a gross profit of approx. SEK380m in 2023. If Starbreeze manages to maintain high recurring revenue in the coming years after launch it will create significant shareholder value.
Supportive Analysis
Payday 2 has generated net revenues of more than SEK1.1b to Starbreeze in less than eight 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”.
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. We would of course be more confident in the quality assurance if more original creators were still operative in the company such as key game designer Ulf Andersson. An incentive program connected to the quality of Payday 3 creates some conviction that the game will be good at launch.
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. We expect a net cash position in Starbreeze of roughly SEK400m at the end of 2023. This is a major contrast to the SEK380m in debt Starbreeze had at the year-end of 2022. However, the commercial result of Payday 3 is of course still very important for the valuation of Starbreeze. We assume Starbreeze is likely a takeover target after the release of Payday 3.
Disclosures and disclaimers