Here's another article to make the world see that ATVI is UNDERVALUED!
Tom C.
MULTIMEDIA WIRE
September 9, 1997
Game Company Trading Multiples Bounce Back As Industry Fundamentals
Show Renewed Strength
Interactive game stocks are up significantly from their early-
year lows, and it appears there is still room for an upside as
investors gain confidence in remaining post-consolidation players
combined with a market environment that's getting healthy.
Based on MMWIRE's analysis of 10 game company stocks (see table)
the group is trading at an average of 1.6 times the next 12-months'
revenue, and about 11.2 times cash flow (EBITDA). [For this analysis,
both net cash and working capital, or current assets minus current
liabilities, are subtracted from market capitalization.]
"These stocks are up from their lows, way off their highs (of
two years ago), but generally on a rising slope--and for good reason,"
says Sean McGowan, game company analyst with Gerard Klauer Mattison &
Co. "PC growth continues to be pretty solid, and the dedicated console
system installed base is as strong as it's been in several years. I'm
not sure we'll see a return to valuations of a couple of years ago,
because current valuations seem to be a lot more rational, but there
is still room for movement," he adds.
Tony Gikas, an analyst with Piper Jaffray, comments "as the
holiday season approaches we expect to see more enthusiasm for these
stocks. And, with multimedia PCs selling for $1,000 that helps bolster
confidence in the sector overall."
Piper's internal analysis has its group of game stocks trading
at about 20 times earnings, or about 30% higher than in March, when
these stocks bottomed out.
Market leaders like Broderbund, Electronic Arts and Midway Games
often move independently from the group, in part because they are
market leaders and valued at a premium relative to other publishers.
Broderbund and EA are valued at slightly more than 2 times revenue,
based on share prices as of September 5.
Small cap companies, those with $20m-$100m in revenue, are
always viewed as a greater risk by investors because one "failure" at
retail can significantly impact revenue and earnings.
"A case like Activision [ATVI] is hard to understand," however,
says McGowan. "The company has completely turned around from several
years ago, is growing top-line revenue at a 40% clip, yet its market
value is lower than a couple of years ago."
Some analysts believe Midway could be poised for a run, since
the company's stock trades at a relatively low cash flow multiple
(10.5 times), and its public float is limited at about 5m shares.
Majority owner WMS is planning to spin it off to shareholders this
year. That, combined with a strong line-up of N64 titles, in a market
that has few N64 titles, plus crossover potential with its arcade
business suggest stronger public support, analysts say.
The differences in these game company valuations can be striking
from within the group and with other, particularly Internet, sectors.
Content companies always are viewed with a skeptical eye on Wall
Street, simply because the business is so unpredictable given its
hits-driven, as opposed to product-driven, nature.
"With these stocks, you have to look at the near term, because
the future is more uncertain. It's just the opposite with Internet
stocks like Yahoo! [YHOO], where investors give the company a huge
degree of support on the basis of long-term potential to dominate a
category and return significant earnings," McGowan says.
The game companies have demonstrated cyclicality, and that's one
reason investors remain cautious about the group. "It doesn't matter
if you are the best if it's a bad business environment," he adds.
Company
12 Mo. Cash Net Price/ Shares Net Market Rev. Cash
Ahead Flow Income Share Out Debt Cap Mult. Flow
($M) ($M) ($M) ($) ($M) ($M) ($M) Mult.
Broderund
225.0 34.9 21.0 30.06 21.0 -135.0 496.3 2.2x 14.2x
Electronic Arts
775.0 110.8 63.6 34.19 55.7 -246.0 1,658.4 2.1x 15.0x
Midway
500.0 77.0 47.0 23.19 38.5 -83.0 809.8 1.6x 10.5x
7th Level
24.0 N/A N/A 2.88 14.5 -9.7 32.1 1.3x N/A
Spectrum HoloByte
110.0 9.9 1.7 5.50 28.5 -15.5 141.3 1.3x 14.3x
GT Interactive
575.0 61.5 39.1 11.38 67.0 -115.0 647.5 1.1x 10.5x
Activision
135.0 20.3 11.2 13.56 14.6 -61.0 137.0 1.0x 6.8x
Byron Preiss Multimedia
8.0 N/A N/A 0.91 4.4 2.7 6.7 0.8x N/A
T-HQ
70.0 8.3 5.0 11.88 6.5 -18.0 59.2 0.8x 7.1x
Acclaim
270.0 N/A N/A 4.16 50.0 -25.0 183.0 0.7x N/A
Ave. Multiple
1.6x 11.2x
# = Year ahead revenue calculated from Sept. 1.
& = Negative number signifies working capital, positive net cash, or
cash equivalents
Source: Company reports, analysis by MMWIRE |
