Benchmarking 02/10/2023

This is the second post in a series to explain how I am building an index of the European gaming industry in the SME segment. It will be followed by 3 other industries in the same segment.

In the first post I wrote about market momentum and investor perception. In this post I will focus on valuation.

When I write "valuation" I am referring specifically to how the market is valuing a gaming SME, i.e. valuation by multiples.

Such a valuation is never a substitute for a specific valuation of your company, with all of the constraints, but it is a reasonable guide to the range of values your business is likely to be in.

# EBITDA multiple: EV/EBITDA

This is the most commonly used valuation multiple in almost all industries.

The valuation of this multiple in our case is on a quarterly basis. Our study starts in 2Q 2018.

ev/ebitda multiple sme gaming company

At the end of Q2, the market is valuing EV at 1.8 times EBITDA.

There are several precisions to be made here. The first is that I always use the median and not the average, and this is because with the median we avoid the extreme values that always distort the market multiple, and in nanocaps there are always extreme values.

The second precision is that in order to use this multiple, the company must be profitable. This is why the median EV/EBITDA is so low here because almost half of the companies in my index are loss-making.

Because of this, I have constructed the following graph:

ev/ebitda multiple bands sme gaming company

The median is equal to the 50% quartile. I have entered the 75% quartile of the best companies (upper range) and the 25% quartile (lower range).

The upper range coincides almost exactly with the median of those companies that have positive EBITDA and the lower range is the same, but with those that have losses.

In a sample of larger cap companies, the median would be the correct value, but in nanocaps with growing SMEs, this value does not have to be the most appropriate. In fact, as we will see with the following multiple, it is better to use the upper range: x11.1.

yoy% multiple sme gaming ebitda

Finally, a very useful chart also tells us that market valuations continue to fall. It relates the valuation of one quarter with respect to the same quarter of the previous year.

Valuations have been falling continuously since the second quarter of 2021.

It almost coincides with market momentum, although it is one quarter ahead of it: valuations decline one quarter before momentum turns negative.

# Sales multiple: EV/Revenues

This is a multiple that I don't like because it is very crude, but it is useful when the company we are valuing is not making profits.

ev/revenue multiple sme gaming company

The sales multiple for a gaming SME in Europe is x3.4 at the end of 2Q 2023.

As all the companies in the index have sales, the band chart does not make so much sense, and in this case, the companies in the upper band are the worst performers.

You can see one thing; a big inconsistency with the EBITDA multiple: the sales multiple comes out higher. This is because companies with very bad results distort the multiples of this market. In this case, the following should be done:

  • (1) If the company is profitable, use the upper band of the previous multiple: x11.1.
  • (2) If the company is making a loss, use the sales multiple: x3,4
yoy% multiple revenue sme gaming company

Here we see that valuations have been falling since Q2 2021 as well, but Q2 2023 has stopped the fall in valuations.

# Book value multiple: P/BV

This is a metric that does not make sense in new companies and startups, but in companies with a track record, it does. It gives us valuable information because, although it does not tell us about the future, it tells us about the trajectory of the business and how the profits generated have been managed.

It tends to underestimate the real value of the business, but it is a very stable multiple.

P/BV multiple sme gaming company

In this case the indicator is annual (and not quarterly like the previous ones).

It is currently at 2, with a value very similar to 2018. It is as if the business were valued similarly to 2018.

ev/ebitda bandsmultiple sme gaming company europe

The evolution:

evolution multiple valuation sme gaming company euope

It gives similar information to the previous one.

# Challenge

One temptation I have had in this part has been to include larger cap companies, which would give more consistency to the earnings multiples and make my life easier, avoiding inconsistencies such as the sales vs. earnings multiple.

But then I would stop looking for the initial goal: market valuation in the SME segment.

In the next few posts, I will talk about business KPIs. This can give us an indication of where in the range of values we are getting.


This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.