Categoría blog: Business models

I have written before about the powerful ecosystem of companies linked to video games in the Nordic countries.

This time it is metascore, a finnish mobile games studio that has managed a €150 million credit line from crosstown friend Supercell. This credit line adds on two Supercell’s previous faith in the company, investing €5 million in 2018, and €15 million in 2020, as well as a €10 million credit line.

Founded in 2014 by Aki Järvilehto and Mika Tammenkoski, initially as a wearable games company, Metacore launched their first puzzle discovery game, Merge Mansion, in 2020 to commercial success. The title counts over 800,000 daily players, and Metacore reports an annual revenue run rate of over €45 million.

We will se how long it takes to go public (IPO) in Nasdaq nordic.

The big companies are focusing on developing the podcast business because they see it as having far more room for growth than many anticipated. New technology has made listening more accessible. New business models are opening up opportunities for a middle class of podcasters. And podcasting’s potential for expansion seems relatively endless given how little it’s encroached on its analog alternatives so far.

The good and dark side of podcasting (attention economy) is that you can consume the product while doing other things. With text and video this is not possible, for example if you are walking, driving, cooking, etc. So it may be an untapped market.

Anyway, there is a lot of free room left because for every 100 minutes on Spotify, people spend 40 on radio and only 6 on podcasts (see this research).

The difference now is the technology, very easy for the user, just a button on the smartphone. Before it was hell. That’s why it is estimated that AM/FM radio is going to be eaten up. We will see.

For further details and more in-deepth analysis read this post.

I am a big fan of Sweden’s gaming ecosystem, small companies (SMEs) that are quickly listed on the Nasdaq Nordic by young, enthusiastic people who are also financially disciplined.

Every month we are going to analyze some European micro-company to learn how it is managed from a financial point of view and if we can learn something to apply to our small companies, wherever we are.

So it is not an exercise to see if it is good for investment, it is a financial learning exercise.

# The company

G5 Entertainment publ AB is a Sweden-based developer and publisher of downloadable casual and free-to-play games for smartphones and tablets. The Company offers a range of game genres, such as Adventure & Hidden object and Strategy & Time management. Its product portfolio comprises two types of games: Free-to-play, providing The Secret Society, Virtual City, and Doomsday Preppers, among others, that are games based on a pay as you go model.

Available on Apple’s iPhone and iPad, Mac, devices powered by Google Android and Windows 8, tablets and e-readers.

Industry class: Electronic Gaming & Multimedia small cap (Europe)

# Financial Overview

# Profitability

EBIT -> 9,7% (7,4% bench.)

Gross margin -> 51,7% (53,4% bench.)

Operating leverage -> 5,75

EPS -> 1,65 usd

EVA margin -> 6,2% (vs 12,9% in 2021 an -0,2% bench.)

Profit/employee -> 15,2k usd (vs 21,1k bench.)

Gross margin has fallen 10% year-on-year (61.7% to 51.7%) but the benchmark is unchanged. EBIT also fell 6.5% (16% vs 9.7%). The changes have affected margins more than the industry.

The business has the capacity to improve the previous ratios, it will depend on demand and a successful pricing strategy.

# Growth

Revenues -> 26,3%

EPS % -> -18,7%

Growth score (0-100) -> 89

Maximun natural growth -> 35%

EBIT down, Gross margin down

# Capital Allocation

ROIC -> 43% (vs 4% bench.)

FCF -> 16,8M (vs yy bench.)

FCF/rev -> 10,7%

Reinvestment rate -> 68%)

The return on assets is 10 times higher than the industry average, cash generation is not very high but ok and reinvestment is also high (although like the rest of the industry). High probability of sustaining growth and generating shareholder value.

# Working Capital management

Current ratio -> 1,7 (vs 2,9 bench.)

WC/Sales -> 9,5%

Cash convertion cycle -> 84 days (vs 75 days bench.)

# Capital structure

Debt ratio -> 30,5% (vs 29% bench.)

CF coverage ratio -> 229% (vs 12% bench.)

Interest coverage ratio -> 57,86 (vs 29 bench.)

Dividend yield -> 3,53% (vs y0 bench.)

WACC -> 7,82%

# Financial strength (scores)

Financial strength (0-9) -> 6,4

Financial health (risk) ->Strong

# Final thougths

Mr Market values the company 5,4x EV/EBITDA, very low. (on third of industry average). The number of analysts is only 1.

A very interesting company, good numbers and undercover by analysts.

One of the best performing stocks in the last two months is Spotify Technology S.A. (SPOT).

Although the company is European (Swedish), it has been listed on the NYSE since April 2018.

It was incorporated in our IPO Index in the ground that it did between December 2018 and January 2019. Since then it has had a 50% return, only last year was amazing 36% yield.

As shown in the graph, the action had the classic behavior of IPO. It goes up a bit at the beginning, in this case more because of the media power that this company has and then it doesn’t stop going down since the end of the lock-up period. As the company’s fundamentals, its business model and quality are good, the price begins to recover to become pure growth.

Now it’s testing a market ceiling again, almost in the same level of initial price. But the most interesting thing is the evolution of the business which is very good, with all financial key figures improving (profitability, cash flow, revenues, ROA, ROE, ROIC, leverage etc).

Bilibili Inc (BILI) is a video hosting site. It is currently the most popular site about anime, manga and video game fandom in China.

The company has been listed on the NASDAQ since March 2018.

In December it was in the top 5 of our Uncommon IPO Index. On January 6th the company saw its shares rise more than 5% on the day and since the beginning of the year (January 2nd) it has been up 22%. Bilbili has had a 38% return in the last month.

Apparently this rise does not respond to a specific event. Let’s look at the main financial data.

Although the company is experiencing great growth, it still does not generate value for the shareholder. It will be very important to see the audited closing financial statements of 2019 and the evolution of 2020. Value generation must accompany growth, otherwise the share performance will not be sustained.

The Trade Desk (TTD) is a digital advertising company, has developed a software platform used by digital ad buyers to purchase data-driven digital advertising campaigns across various ad formats and devices.

The company is based on California and was listed on the NASDAQ since October 2016.

In December it was in the top 5 of our Uncommon IPO Index, despite having fallen 13.9% on December 2 . In these first two weeks of January, the share is up 10.5%:

If we ampliate the focus we can see the structure of the price looks good and is consistence:

If we expand the focus we see that the price structure is good and the price increase is consistent:

The share price has multiplied by 6 in just two years.

Apparently this rise does not respond to a specific event. Let’s look at the main financial data.

The evolution of the main key financial data is very good, although the last year has deteriorated slightly (they have only stopped improving). The company is experiencing great growth, accompanied by generation of shareholder value. The latter is something very difficult to achieve (spectacular growth + generation of shareholder value) and The Trade Desk has achieved it: ROIC, ROE and ROA two-digit FCF growing.

NCAB Group (NCAB) is a global full-service supplier of printed circuit boards, based on Sweden, with local presence in 17 countries and sales in 45 countries.

The company has been listed on the NASDAQ Nordic (Sotckholm stock exchange) since June 2018.

The business model is not fully innovative but the way to manage it is. Company is categorized as Small Cap, within the technology sector.

Let’s see its key figures.

Currency: SEK | Exchange rate: 10 euro/SEK

The company’s sales have a constant growth and the profits have been growing in a greater percentage. The return on assets is over 10% and the return on equity is over 50%, which tells us about an optimization of leverage. It has no liquidity problems (this is also improving). 2017 was an atypical year with worse results.

Let’s see what it has performanced in this time in the stock market:

Pending subject

The pending subject is the traded volume, which is low, although this is common to almost all European small caps.

We still have to see how the financial year 2019 has closed, which will be published in February (annual financial statements). Meanwhile we have the comparisons of the third quarter.

The sales have grown by 8% compared to the same period of the previous year, the profit has increased by 20% the profitability of the capital used improves slightly to an extraordinary 38% and the operating cash flows have doubled.

This company not only grows steadily, but creates abundant value for the shareholder. In the Nordic Stock Exchange small caps like this offer growth and value.

And by the way, 80% profitability in 2019!