Earnings Concerns Appear Overblown
The author is an analyst of Shinhan Investment Corp. He can be reached at sokang@shinhan.com. -- Ed.
Earnings concerns appear overblown
Sales from the PUBG IP typically slow down in the second quarter due to weak seasonality. However, we believe Krafton actually saw YoY growth in 2Q22, after factoring out the temporary increase in sales of PUBG Mobile gift cards in 2Q21. Moreover, we expect upcoming content updates and IP collaboration events to lead to an upturn in user traffic and sales in 3Q22. Against this backdrop, concerns that 2Q22 results point to a slowdown in PUBG IP earnings from 2H22 appear overblown in our view. Instead, we recommend focusing on the company's solid fundamentals proven by decent earnings in a typical weak season, and the brighter outlook for 2H22 and 2023 with a wider variety of projects underway at present vs. the past.
Increasing diversity to drive growth
We believe the biggest competitiveness of Krafton lies in its vast workforce capable of developing all types of games including open world, shooting, strategy, and role-playing games (RPG). The company's increasingly agile response to fast-changing mainstream trends is expected to be put on display with the release of new games slated for end-2022 and 2023.
Project M is a turn-based strategy game developed by Unknown Worlds. The official title, the game's universe, and gaming clips are set to be unveiled at Gamescom on August 24, with early access to the game expected to start in 2H22. While market expectations are still low for Project M due to limited information, we believe the game has the potential to become a long-term cash cow if it sees strong market response upon release. In addition, development of a sequel to Subnautica, the open-world game that showed off Unknown Worlds’ developing capabilities, is underway for an expansion of the company's open-world game line-up.
Krafton is also expected to show off its reinforced strengths in shooter games through the release of The Callisto Protocol by Striking Distance Studios, as well as the development of Project Black Budget and Project Biringam leveraging on its experience in developing PUBG. Progress already made on the development of new shooter games is seen positive with the company's main genre, looter/open-world shooter games that combine shooting with open-world and player versus environment (PvE) elements, projected to emerge as the new mainstream trend in 2023.
Meanwhile, we expect the company's acquisition of various game studios with cash secured through PUBG to continue going forward. With recent market correction presenting opportunities to acquire game developers at cheaper prices than the previous year and the company's cash reserves reaching above KRW3tr, M&A efforts should continue in the near term and help to drive further improvement in enterprise value going forward.