- Ubisoft Entertainment SA saw a decline in booking growth in the most recent quarter.
- Delays of the Avatar gaming title could also place downward pressure on net bookings.
- I do not take a bullish view on this company at this point in time.
Investment Thesis: Lack of net bookings growth in the most recent quarter means that Ubisoft may see low upside in the short to medium-term.
In a previous article, I made the argument that Ubisoft Entertainment SA ( UBSFY ) might see some downside risk ahead due to inflationary pressures - but that potential growth in PlayStation 5 demand could prove to be a significant growth driver.
On a longer-term basis, we can see that the stock saw a significant decline through 2021 and has failed to make back any significant gains this year:
The purpose of this article is to assess whether the stock could see upside from here on the basis of recent earnings results.
Performance
When looking at net sales performance for Q1 2022-23 , we can see that net bookings are down by 10% from last year, in spite of better than expected performance across the Assassin's Creed and Tom Clancy's Rainbow Six titles:
Given the drop in sales - investors are likely to pay more attention to cash flow. Moreover, I stated in my previous article that cash relative to short-term borrowings had seen a decrease in March 2022 from that of the previous year. From this standpoint - the combination of lower net bookings along with a drop in cash levels seems to have kept the stock low. Investors do not appear to be confident enough that the company can increase net bookings, or indeed keep sufficient cash reserves to compensate for the shortfall in bookings.
As of June, sales of PlayStation 5 hit 20 million units worldwide. While supply chain issues have kept sales below potential - the console still appears to be seeing higher demand than that of the PlayStation 4 - with the former reaching sales of 10 million one month earlier than the latter.
In addition, we can also see that the EV to EBITDA ratio is trailing at levels we have not seen since 2017. Moreover, earnings per share is still trading at the higher end of what we have seen over the 10-year period, in spite of a recent decline.
In this regard, there could be a case for significant upside if we see a rebound in earnings. However, I take the view that net booking growth would need to rise significantly for this to happen.
Looking Forward
Going forward, it is unclear to what extent inflationary pressures will impact gaming demand as a whole.
However, PlayStation 5 sales have so far failed to bolster Ubisoft's net bookings from major titles such as Assassin's Creed Valhalla and Tom Clancy's Rainbow Six Siege. Moreover, further delays to gaming titles such as Avatar: Frontiers of Pandora represents another setback for Ubisoft - as this means the game title will not be released to coincide with that of the upcoming Avatar: The Way of Water film this December and thus could mean that eventual title sales remain below potential.
The company plans to implement cost-cutting measures through cancelling certain gaming titles such as Splinter Cell VR and Ghost Recon Frontline, as well as implementing a mobile partnership deal with an unnamed partner who is set to utilise one of Ubisoft's IPs - and the deal is expected to significantly bolster the company's mobile footprint and mobile revenue. However, it is difficult to judge the potential profitability of the partnership at this point in time and whether a boost in mobile revenue will be sufficient to bolster earnings growth overall.
Conclusion
To conclude, Ubisoft's recent net bookings performance was not overly encouraging, and the company has yet to see significant return on the Assassin's Creed Valhalla and Tom Clancy's Rainbow Six Siege gaming titles. Moreover, delays to the Avatar: Frontiers of Pandora gaming title could place further downward pressure on net bookings.
Overall, I do not take a bullish view on this company at this point in time.
For further details see:
Ubisoft: Little Upside At This Point In Time