UBSFF - Ubisoft: Still An Upside But A Riskier One

2024-01-03 01:34:33 ET

Summary

• Ubisoft has generated positive returns, but still has a long path back to profitability.
• The company's 1H results were decent, with good bookings and strong digital revenues.
• Ubisoft needs to focus on quality and reinvent itself as a quality games developer to compete with larger powerhouses in the industry.

Dear readers/followers,

If there's one positive thing I can say about my Ubisoft ( OTCPK:UBSFY ) investment, apart from the fact that it wasn't a large investment overall, it's that the company has generated positive returns. Not alpha, certainly, but positive returns, and until November, it was at a fairly good spot.

Then the company reported 1H, and things went south again not long after that.

Ubisoft has, unfortunately, a long path back to profitability (that I would be interested in) and still, a lot to do to generate appeal from a customer base that wants more and more.

It has the advantage of being the owner of some of the best well-known video game franchises, including but not limited to Tom Clancy and Assassin's Creed - yet has managed to muck up a few potentials over the last few years, and under-deliver, as I see it, as a result of much of the company's internal issues - namely how it handles employees and seems to handle projects overall.

In this article, I'll update on Ubisoft for 3Q23, and provide you a window as to where I believe the company may go in the next few years.

There is an upside here, but we do need to be careful.

Ubisoft 1H - and moving into 2024E

So, in some ways, the results were actually decent. The company managed good bookings, growing 17.6% at a year-over-year period and managing over €800M for a half-year, annualizing at almost €1.7B. Digital revenues have taken over a total of 87% of the company's bookings, and the company manages decent stickiness to its players, with over 63% of total net bookings on a recurring basis.

The company saw an increase in unique active players, but a slight decline in monthly active users, to around 36M.

However, 2Q was expected to in fact be a fairly poor quarter - and it outperformed quite well, with over €150M improvement over the expected quarterly booking targets.

Why did Ubisoft outperform?

Stronger than expected revenues from its back catalog, mostly due to better monetization. This is a good thing, but it does not address what I believe to be the underlying problem with Ubisoft. The company needs a sort of renaissance in order to reinvent itself as a quality games developer. When compared to many of the titles released this year, including games like Baldur's Gate 3, I do not believe that any of Ubisoft's titles in fact hold much of a candle to these.

But the company did well - much better than expected - and this has led Ubisoft to expect strong bookings growth for the 2024E period, with operating income forecasted at the €400M level for the year. Not because of nothing - the company is planning to release a few new titles, some of which at this point have come out.

However...

While I hesitate to call any of these titles overhyped, I've actually followed many of them and know exactly what I expect from them - just as I knew very well that BG3 was going to be an absolute smasher of a game (though even I was surprised at the reception it got) - I know that titles like Skull and Bones likely is going to be a bit of a nothing-burger judging by what I have seen the past few updates.

You see, Ubisoft's problem as a developer has been, and continues to be the re-hashing and retreading of old ground, coupled with spreading itself too thin across far too many projects, which means a lack of talent in each, and a lack of support for each of these many potentially good titles.

An example of this is the actual number of Assassin's Creed titles that the company has produced in what even generously speaking must be called a relatively short time frame. And while I am not calling any of these titles "bad games", per se, I quite enjoyed Valhalla, they cannot under any circumstance measure up against a game like Baldur's Gate 3 or many other titles that have come out this year.

What I am saying is that Ubisoft seems to be making a business out of producing what I would consider being very "subpar" games, and it's heartbreaking to see because the company and its staff is capable of much more.

The competitive landscape isn't making things any easier for Ubisoft easier. The company competes against larger and larger powerhouses such as Microsoft ( MSFT ), Nintendo, Activision Blizzard ( ATVI ), and others - and I cannot remember the last time a Ubisoft "blockbuster" was at the level of a blockbuster from another studio that I really enjoyed.

The company's main, continued advantages, and what makes this company worth investing in, at a cheap price, remains its developer pool with over 25 studios across the world. It means that Ubisoft has the realistic capacity of working on many titles simultaneously. The problem becomes when none of these titles really deliver what other games from competitors deliver - and when the company continues, as I think it has and does, to dilute down the quality of its main licenses, like Assassins Creed.

The company's focus on the high-end of the market, meaning it focuses on blockbuster games , rather than small games, and adding to this with market advantages, really unfortunately hasn't gone hand in hand with what was being delivered by those games. The last set of Assassin's creed games is a good example, with plenty of copy-pasted and filler content, rather than what would make a game like this replayable and playable for a long time - something truly worthy of a high-echelon 90-100/100 score.

What I want to see from Ubisoft is a doubling down on quality. It's my stance that with sizing rationalization, a refresh in the developer pool, and a focus on the "right" sort of project here could result in Ubisoft in a few years once again being considered one of the "bigger" and more relevant developers out there.

In my eyes, Blizzard/Activision has gone the way of the dinosaurs when it comes to gaming quality - and it has been for several years. The studios that I have a close eye on at this time is Larian, CD Projekt, Take Two, and similar ones, that seem to focus above all on quality gaming.

Ubisoft is a company that could go either way - and at a cheap enough price, this makes it worth investing in.

The last share price for the French ticker UBI, which is the one that I invest in, was €23/share. This means that we're at the lowest level we've been during almost the entire year, with the exception of the beginning.

Let's look at forecasts and valuation and see what we have here.

Valuation for Ubisoft

In my last article on Ubisoft I went through many of the issues I touch on here. I even gave some examples with the company's latest titles and the issues they face. Among them, the critic and user scores for things like Far Cry.

The user score has improved up to a 5.2 in the meantime, but the critic score is down to 73. Call it what you will, but I will not refer to this game as a "success" - and I really liked Far Cry 5, and even FC5 only managed a 81/100 with a 7.0 user score. (Source: metacritic)

In order for this company to be worth buying to you, you need to believe in its ability to deliver the following earnings, and good games once again.

If it does, then the upside could be 15%+ per year - and even higher.

Note here that I am estimating the company at 20-year averages, not short-term valuations. Also be aware that Ubisoft, for the past 10 years, has negatively missed estimates over 50% of the time with a 10-20% MoE, so I wouldn't consider these estimates to be all that likely - but even a lower level could be interesting.

Gaming remains one of the hardest areas I find possible investing in. That's why my investments in the space are so few, and so limited in scope. But I am very cognizant of the fact that in the right circumstances, 200-500% ROR is entirely possible in this space, and this is why I keep an eye on it.

I do not invest in gaming for safety. I could have 15% annualized with a 4% yield from a grocer any day of the week - indeed, this is where most of my capital is flowing.

However, these investments provide plenty of upside trajectory, and at the end of the day, given the company's fundamentals, I do not view Ubisoft as a "risky" play in the sense that I expect a loss of capital.

22 analysts from S&P Global Follow Ubisoft's native ticker. They give the company a conservative range starting at €17 and going all the way up to €50/share, which I believe to be a fair estimate of the spread of the company's potential under a range of different investment circumstances and results. The average is €31/share, but despite this significant undervaluation, as most consider it, only 9 have the company at a "BUY" or equivalent positive rating, with most either being "HOLD" or one of the underperform ratings, or even "SELL".

The message is clear, and it's one I generally actually do agree with. I would prefer Ubisoft to further "prove" itself before investing more capital here.

That being said, under any amount of positive circumstances here, and a turnaround, this company is capable of outperformance, and that's why I in the end do consider the company somewhat undervalued here still. I'm lowering my PT to €30/share to reflect the continued uncertainty relative to market opportunities available here - but this still makes the company a "BUY", albeit a speculative one (which it has always been to me).

I continue to expect a normalization from the company in the long term and am keeping my shares. I also may add more.

Thesis

• Ubisoft is, at least in theory, an attractive company with a good upside at the right price. However, due to what I would consider mismanagement, the company's IP and pipeline don't really hold many products or games that I would consider likely to turn the currently unfavorable trends around.
• Ubisoft has a deep war chest, and I expect the company to eventually turn around. However, with the pipeline now updated and what'll happen in fiscal 2023-2024, it would further impair the company's valuation.
• I'm moving down 20%, and now consider the company a speculative "BUY" with a PT of €30- no more.

Remember, I'm all about:

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them ( italicized ).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

I would call it qualitative, inherently, and cheap as well as with an upside, but I wouldn't call it well-run or paying a dividend. For that reason, I call Ubisoft a "speculative BUY".

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