CCOEY - Capcom: Strong IP In High-Growth Industry

2024-01-21 20:05:36 ET

Summary

• Capcom's strong IP lineup, including franchises like Resident Evil and Monster Hunter, positions it as a leader in the gaming industry.
• The company's popular franchises have the potential for growth through adaptations into movies and TV shows.
• Capcom's technological innovations, such as its game engine and use of AI, further enhance its position in the market.

Capcom ( CCOEY ) has established itself as a formidable player in the entertainment and video game space. The company boasts an incredibly strong IP lineup with popular franchises like Resident Evil, Street Fighter, and Monster Hunter. Even as competition in the gaming and entertainment space has ramped up significantly over the past decade, Capcom has remained at the forefront of the industry by leveraging its IP wisely.

Capcom will likely continue to perform well as a leader in the booming gaming industry.

Robust Franchise Portfolio

Capcom boasts a lineup of strong IP that only appears to be growing in popularity. The company's renowned Resident Evil and Monster Hunter franchises have both grown notably in recent years, with big hits like Resident Evil Village and Monster Hunter World resonating with gamers. Even Capcom's Resident Evil remakes of Resident Evil 2 and Resident Evil 4 performed incredibly well.

Aside from its flagship franchises, the company also owns a plethora of other popular IPs like Mega Man, Street Fighter, Devil May Cry, and Dead Rising. All these franchises have far more room to grow, especially as some are getting adapted to the big screen. For instance, Netflix is developing a live-action movie of Mega Man and an animated series of Devil May Cry. The growth in the popularity of The Witcher could be an indication of how these screen adaptations will boost the popularity of these franchises.

Video Game adaptations have become incredibly popular in recent years, with some of the biggest hits coming from video game adaptations. For instance, movies like Mario and TV series like The Last of Us have broken records in their respective genres. Capcom could see a major boost in value once its franchises start to get adapted, be it through movies or TV shows.

Forefront of Gaming Innovations

Capcom has a reputation for leveraging new technologies to enhance its products. For instance, the company's proprietary game engine RE Engine utilizes detailed textures and realistic lighting to make their games some of the most graphically sophisticated in the industry. Capcom has also experimented with augmented reality and virtual reality to make their games more immersive. In fact, Resident Evil 7: Biohazard can be played entirely using virtual reality.

It would not be surprising if Capcom became one of the first gaming companies to integrate generative AI into its games, considering how powerful this new technology is. The company already appears to be using AI in some of its games, with a notable example being Exoprimal . As AI capabilities grow, Capcom will likely be first in line to integrate new AI technologies.

Financials

Capcom reported relatively lukewarm quarterly results in Q2 . While the company's earnings increased significantly QoQ from ¥49.08B to ¥74.93B, the company's EBITDA decreased 56.7% to ¥49.08B during the same time period. However, Capcom's financials could outperform analyst expectations in Q3, especially considering the resurgence of Monster Hunter, which experienced a concurrent Steam player count of ~145,000.

If Capcom manages to beat some analyst EPS estimates of $0.30, which is not out of the question given the recent popularity of their top IP, the company could see upward momentum. The relative dearth of large game releases this past quarter could also help bolster Capcom's sales during the same period.

Risks

A large portion of Capcom's revenue comes from its flagship franchises like Resident Evil and Monster Hunter . While this has been great for Capcom given these franchises' recent successes, they can quickly turn into a weakness if any of them underperform. The company could see major downward movement if the next sequel of a Resident Evil or Monster Hunter were to perform below expectations.

Capcom is also competing against increasingly well-financed competitors. With technology giants like Microsoft ( MSFT ) acquiring pure plays like Activision Blizzard, it would not be surprising to see the cost of game development skyrocket. The industry is already witnessing a major ballooning of development costs, which could have a negative impact on the relatively small Capcom. For instance, Cyberpunk costs more than $400M to make when accounting for patches and its DLC. This figure pales in comparison to the $2B figure that Take-Two is rumored to be investing in GTA 6 across its lifespan.

Conclusion

Capcom's robust market position, which is driven by its strong IP lineup and technological prowess, makes the company an attractive investment opportunity at its current valuation of ~$7.7B. Capcom looks even more undervalued when comparing its PE ratio of ~25 to other popular US pure-plays like Take-Two Interactive, which has a PE ratio of ~52.

While Capcom appears to be a solid investment, investors should still be wary of the increasingly intense competitive pressures that are facing the company. As a whole, Capcom is a solid buy for individuals looking to invest in a pure-play gaming company with a good deal of growth potential.

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