UBSFF - Ubisoft: Let The Games Begin

2023-07-14 09:39:21 ET

Summary

• Ubisoft unveiled an impressive lineup of games at its annual game showcase, including Assassin's Creed Mirage, Avatar Frontiers of Pandora, and Star Wars: Outlaws. The company's FY24 P/E is approximately 14x, a discount of nearly 30% versus the industry median of 20x.
• Assassin's Creed Mirage is set for release in 2023 and has generated enthusiasm among gamers. Other notable releases include Avatar: Frontiers of Pandora, expected to launch in December 2023, and Star Wars: Outlaws, scheduled for 2024. Both games are expected to generate over $1 billion in revenue within their first 12 months of release.
• With adequate pipeline visibility going through 2024, I think it is reasonable to expect that the company's target of €2 billion in revenue and €400 million in operating income is achievable.

Thesis

Ubisoft (UBSFY) held its annual game showcase in Los Angeles on June 12th and unveiled an impressive lineup of games: Standout AAA titles included Assassin's Creed Mirage, Avatar Frontiers of Pandora, and Star Wars: Outlaws. Overall, as a result of this event, I reiterate my "Buy" recommendation for Ubisoft stock - pointing to a consensus FY 24 P/E of approximately 14x, a discount of close to 30% versus the industry median of 20x according to Refinitiv consensus estimates for key competitors including Activision (ATVI), Take Two Interactive (TTWO) and Electronic Arts (EA).

Game Showcase - What We Now Know

Assassin's Creed Mirage has already been announced for 2023 release in 2022. But Ubisoft's most recent event added a new story trailer, a gameplay demo and some technical/ commercial details. In general, the return to the style reminiscent of the original Assassin's Creed games has been well-received by the audience, including gamers and critics alike. Additionally, judging from YouTube and social media comments, the game's narrative has generated enthusiasm and built-up demand for the game's release on October 12, 2023. The game will be priced slightly below expectations, at ?EUR 50, as compared to ?EUR 70 for previous Assassin's Creed titles, mostly as a function of a smaller-scale open world map.

Other exciting Assassin's Creed updates include:

• Assassin's Creed Nexus VR set to arrive on Meta Quest during the upcoming holiday season. While the concept of an Assassin's Creed VR game is interesting, no in-engine gameplay footage was unveiled at the moment.

• Assassin's Creed Codename Jade, an expansive open-world mobile game set in ancient China. The title will be published by Level Infinite, a subsidiary of Tencent -- the mobile licensing deal announced last July.

Avatar: Frontiers of Pandora, a release that has been long-awaited, is now expected to launch on December 7th, 2023 (capturing the Christmas shopping demand). Avatar: Frontiers of Pandora will be an open world action/adventure first-person games including gun fights. The game's core experience is a single-player adventure/ discovery theme; however, there is the possibility for a two-player co-op.

According to Ubisoft, the game will initially only be available on new-generation consoles such as the PlayStation 5 and Xbox Series X/S, as well as PCs. However, despite the somewhat restricted console targeting, I would not be surprised if the Avatar game surpasses 12 million units and $1 billion of revenues for Ubisoft within the first 12 months, given the popularity of the franchise and highly positive social media commentary on Ubisoft's work. For reference, a $1 billion of revenues realization within 12 months of release would be in line with what other blockbuster hits achieved,.e.g, Red Dead Redemption 2 (2018, Take Two Interactive), Overwatch (2016, By Activision) as well as GTA and CoD, whose releases frequently capture between 10 - 20 million of sales within one year of launch .

Star Wars: Outlaws is another blockbuster AAA title from Ubisoft that has been long expected, and teased during the showcase with a trailer and game play insights. According to Ubisoft, the game, which is set to be the first-ever open world Star Wars game, is now scheduled for " calendar year 2024".

Similar to Avatar, Star Wars Outlaws has captured enormous gamer enthusiasm, and will likely accumulate more than $1 billion of revenue within less than 12 months of release. For reference, the Star Wars titles produced by EA have achieved about $3 billion in life-time revenue.

Skull and Bones: Despite multiple delays and a recent announcement of an "early FY24" release, no specific release date has been given. A closed beta, however, is set for August 25 to August 28.

Prince of Persia: The Lost Crown was quite an unexpected addition to the game pipeline, and is scheduled to be released on January 18, 2024. The game, which is a quite a far-fetched 2D spin-off of the original Prince of Persia title, has received - generally speaking - disappointing feedback.

XDefiant is Ubisoft's attempt to capture the Call of Duty audience with a free-to-play, fast-paced arena shooter. To showcase the game's exciting gameplay and immersive experience, Ubisoft shared a compilation of live clips and streamers' reactions, which were collected across 28 tests involving over 1.5 million players. The game is set to make its debut later this summer, accompanied by an open beta session pre-release.

Other games scheduled for 2023 are The Crew Motorfest (14 September 2023) and mobile game The Division Resurgence (undefined fall 2023 release).

Risks

As I see it, there has been no major risk-updated since I have last covered Ubisoft stock. Thus, I would like to highlight what I have written before :

First, a worsening macro-environment could negatively impact Ubisoft's business operations. On the demand side: including inflation, rising interest rates and falling asset prices might negatively impact consumer sentiment and entertainment spending. If challenges turn out to be more severe and/or last longer than expected, the company's financial outlook should be adjusted accordingly.

Second, while high brand-equity companies such as Ubisoft, with quality franchises (e.g., Assassin's Creed, Far Cry), see relatively little impact from direct price competition or competitive cannibalism, Ubisoft's competitive positioning and future success are deeply intertwined with the company's ability to successfully innovate and market new games. Ubisoft's ability to innovate and launch industry-leading entertainment solutions must further be analyzed in a relative context versus competitors such as EA, Take-Two Interactive and Activision Blizzard.

Moreover, reflecting on Ubisoft's game pipeline, investors should not disregard Ubisoft's 'unique' track-record of game delays. And as markets are excited for upcoming releases, a delay of games could pressure Ubisoft's valuation.

Conclusion

On the 12 th of June 2023, Ubisoft held its Summer Forward Event, showcasing and detailing the upcoming games release pipeline. The key takeaway for me is the prospect of an exciting FY23-24 line-up, including Assassin's Creed Mirage, Avatar: Frontiers of Pandora, Rainbow Six Mobile, The Division Resurgence, Prince of Persia: The Lost Crown, Skull and Bones, The Crew Motorfest and XDefiant.

While Ubisoft has struggled to publish game volume in the past, the 2023 showcase gave confidence that the French gaming company is still a top content studio; And, with adequate pipeline visibility going through 2024, I think it is reasonable to expect that the company's (self-set) target of €2 billion in revenue and €400 million in operating income is achievable for the next two years -- suggesting that Ubisoft is trading at a x12 EV/EBIT, vs x18-20 for US peers. Reiterate "Buy".

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