G5 Entertainment (G5EN).
G5 is a Swedish company that develops and publishes free-to-play games for smartphones, tablets, and personal computers in Sweden.
The company (which has a wildly volatile stock price) has a spectacular track record. The stock price is down approximately -85 % from its peak in 2021. Still, CAGR since IPO is 23 % – excluding dividends.
So what has happened to the business to cause such a fall in the valuation? Not that much, really. EPS had a nice run between 2015-2018 and then fell back quite sharply during 2019. Stock price followed suit both up and down, characteristically exaggerating both the up and down move. When reported EPS then turned back up again during the pandemic, señor Market extrapolated that growth. With hindsight, it is clear that this was over-optimistic. It is also clear that sales started stagnating already around 2018.
It seems that now the market might be over-pessimistic. After all, this is a company with 30 % ROC (45 % on avg. last 10 years) trading at a 4 times EV/FCF and 5 times EV/EBIT. And it's not as if this is peak earnings either –– EPS is down 50 % from peak, while FCF has been quite stable last 4 years. Also, the company has taken a more cautious approach to how they calculate earnings . Now I'm no accountant, and I don't remember the specifics of it. But this might be having a deflating effect on EPS as compared to some years ago.
For this stock to be a real bonanza, G5 needs one (or preferable several!) of their new games to be a success. But that would just be a bonus. That's sort of like a free option that comes with the stock. (A nice feature of that "option" is that it's sort of a binary situation, and like a Black-Scholes priced option, the stock doesn't take that in account when pricing the company, IMO – so if success should occur, the stock should rally quite sharply (as it has twice in the past.)
Should such a new game success elude it/them/us, the stock is still cheap enough to yield a good reward for the patience of its falling number of remaining investors. It's legacy business seems stable, and sticky. Div yield is now 9 %. (And they only pay out 60 % of EPS (and 45 % of FCF). They have a big net cash position and the business doesn't need much capital, so the div should be well protected.)
The largest shareholder is CEO and co-founder Vlad Suglobov. (Or technically, the CEO claims that the holding company that owns the shares are owned by family members to him, so that's a little weird – but he seems like an trustworthy guy, so I'm not too worried about that detail.) The second largest shareholder is another insider, and then there's Swedish retail investors and some institutions (20 % institutional ownership).
I see this as a stable low-growth high-margin business, with capital gains potential in the stock if the company should have some success with new games. Little downside risk, large upside optionality.
Would love your thoughts on the stock/company!
Well-wishes,
Petal |
