UBISOFT’S RECENT UPDATES
• F2Q21 revenues of €345mn have beaten FactSet consensus by +12%, driven by strong support across its portfolio (Rainbow Six Siege, For Honor & Assassin’s Creed Odyssey, Ghost Recon Breakpoint and The Division 2 especially).
• Ubisoft lowered its F2021 bookings targets of €2.2- €2.35 bn (vs. ~€2.35 - €2.65 bn prior) and EBIT of €420- €520mn (vs. ~€400 - ~€600mn prior) due to the delayed release of Rainbow Six Quarantine and Far Cry 6.
• Ubisoft successfully issued a €600m bond, maturity 7-year, with an annual coupon of 0.878% on November 18. The bond was 5 times oversubscribed, showing investors’ trust on the company. This is the second time Ubisoft has issued a bond on the market, a new source of financing that will allow the company to support its external growth strategy.
UBISOFT BUSINESS MODEL AND STRATEGY
Ubisoft puts forward the diversification of its game portfolio. Their portfolio enables them to address many different customers on many different platforms (consoles/PC/mobile).
- They have highly developed games as Assassin’s Creed. This franchise is recognized for its breathtaking graphics, the complexity of the story and the liberty allowed to the player. The different Assassin’s Creed take place in historical periods (Egypt, French Revolution, Venice). Ubisoft emphasises the historical accuracy of their games. (Awards in June 2019 page 15 rapport). Tuesday 16th of November, Ubisoft announced that the launch of AC Valhalla was the most successful launch in the history of the company. This success allowed Ubisoft’s share price to grow by 3% on Wednesday the 17th .
- They have strategical action game (Rainbow Six, Tom Clancy’s franchise),
- open worlds (Far Cry, Watch Dogs)
- and familial games (Just Dance).
Many games are on their way to be launched by Ubisoft in 2021
- Far Cry 6
- Riders Republic
- Prince of Persia: Les Sables du temps Remake
- Tom Clancy’s Rainbow Six: Quarantine
- Assassin’s Creed VR, on Oculus Quest
- A game based on the Avatar franchised was supposed to be launched in March 2021 but was postponed to 2022 or 2023.
SWOT ANALYSIS
Strengths
- One of Ubisoft’s strength is therefore its very diversified game portfolio. Ubisoft owns many successful franchises (Assassin’s Creed, Far Cry, Tom Clancy’s) and is a leader in open-world games (AC, Far Cry). Ubisoft has gained a strong reputation in the industry as a very qualitative company.
- Ubisoft is a leading company for “buy-to-play” games.
- Ubisoft is the third largest independent publisher in the world for physical game sales.
- The company’s online platform, Uplay, is growing to distribute the company’s services. Uplay represents 40% of the digital sales on PC. The group strengthens its presence in social media and community.
Weaknesses
- The company suffers from its low presence in the mobile games market. Only 11% of their sales are on mobile games.
- Ubisoft’s presence in Asia/Pacific is low despite of the great appetite of Asians gamers. This market is dominated by some Chinese companies, the biggest of them being Tencent which constitutes the biggest Video gamers network in the world. Ubisoft faces a decline of its profits.
Opportunities
- The cloud industry is rising now. Cloud enables gamers to play anytime, anywhere. Ubisoft bough its own servers to allow gamers the possibility to play whenever they want. Ubisoft faces the opportunity of digitalisation, as the hard copies are reducing compared to digitalized ones.
The ability to host servers and the numerical market (Uplay) will represent key elements of Ubisoft’s future. In November 2018, Ubisoft bought i3D.net, a top 10 company hosting servers.
Ubisoft missed the mobile games market at the first time but seems willing to reduce the gap. An opportunity would be to lead strategic acquisitions, especially in the free-to-play market and in the mobile games market. They recently bought Kolibri Games and Green Panda Games, two companies in this sector.
Threats
- The video-games sector is highly competitive and fast-moving. Ubisoft faces many major companies who are more fast-growing. The biggest company in the industry is Tencent, the market leader of F2P (free to play). The company owns many successful platforms, such as Steam or WeGame which enables the gamers to play AAA games. Tencent has the biggest gamers community in the world.
- The main competitors of Ubisoft in terms of console and PC games are Activision Blizzard, EA, Nintendo, and Take-Two Interactive. Like Ubisoft, EA and Activision Blizzard’s activities are based of successful franchises (Call of Duty, sport games, the Sims). Nintendo has a very large game portfolio and addresses then a very large public. Nintendo has more than doubled its turnover between 2017 and 2018 thanks to its consoles sales (Nintendo Switch) and to the dedicated games.
ESG ANALYSIS
Ubisoft is doing well in terms of ESG. According to Reuters, its ESG score is B-. Ubisoft is leading a resource reduction policy. The digitalisation of their products aims to reduce pollution as the hard copy of the game is more polluting than the digital one.
There is a 22% female representation in their teams and just one female member in the Executive Committee. The company defends itself saying that the “video game industry’s workforce mainly consists of men, with only 15% to 30% women” (annual report).
The company was ranked A+ in terms of controversies by Reuters in 2018 and 2019. Nevertheless, the company faced a scandal in July 2020. Some employees and former employees were accused of sexual harassment and assault. The CEO, Yves Guillemot declared in July he was “committed to implementing profound changes across the company to improve and strengthen our workplace culture”.
In terms of governance, the group claims a policy of nondiscrimination that enables an equitable representation in the management bodies. The company was ranked C+ by Reuters in 2019.
The Gaming Market
The video game industry was on a raise even before the Covid outbreak, with a global turnover of $100,67B in 2019.When it comes to rankings, video games on phone come first (51%) followed by games on PC (30%) and on consoles (11%). The industry also has a 12.9% CAGR over the past 10 years (vs Ubisoft’s which is slower). The trends of the industry are pretty good as people tend to play more. Also, it appears that players spend more money on additional services (Season pass, subscriptions), therefore increasing gaming revenues.
Moreover, it is worth noticing that parts of numerical sales are increasing (69% of sales in 2019 vs 58% of sales in 2018 for Ubisoft). The video game industry also has to deal with the raise of online platforms : raise of Steam with 4,3Bn of sales revenues in 2017 → cloud gaming.
About Ubisoft’s leadership in the industry, it is only behind in terms of market share from Activision Blizzard and Electronic arts. It historically gained market share not only thanks to its present day successes but also thanks to its previous ones: Rayman, and Just Dance.
It is also important to state the importance of esport for Ubisoft. Since according to the esportsobserver Rainbow Six Siege is one of the most played esports games in the world. Although, a problem that relies too much for Ubisoft is that they rely too much on putting a new Assassin’s creed every year, causing sometimes a delay in yearly revenues.
Impact of Covid-19 in the industry
The environment of gaming has changed due to Covid-19 crisis. As many countries were compelled to implement national lockdowns in Spring, people stayed at home and were more prone to play video games.
According to a report released in June by the French Ministry of Culture forecasting the impact of Covid 19 on stakeholders of the cultural sector (assuming there would not be another lockdown in 2020) in 2020, the crisis has been profitable to the Video Game industry, as shown in the graph below.
Depends on the effectiveness of the vaccine. If regulations are softened for good, maybe players would be bored and play less: enjoying life outside home, therefore, we can expect a slight decrease in sales.
FINANCIAL ANALYSIS
Due to the positive impact of COVID on the gaming industry in whole, Ubisoft is on track to record abnormal revenues this financial year (eFY21). Based on the company’s expectations as mentioned in the half-yearly report, It is expecting revenues in the range of 2250 million Euros. This is a 45% increase in comparison the previous year. For the year ending 2022, we are expecting the revenues to drop 10 percent as a result of the fading effects of the pandemic and WFH restrictions being lifted. This is still a 31% increase compared to 2019-2020 FY.
Average revenues for Ubisoft from 2012 to 2020 have witnessed a 5% annual growth from 2012-2020. This is in comparison to the 10 percent growth the gaming industry has seen in the same time frame. We expect this trend to continue and expect Ubisoft to continue growing at 4% (in comparison to 8% growth of the gaming industry projected) from 2022 till 2030.
The Capital structure is mostly equity-based (87%) rather than on debt.
VALUATION
• For the DCF valuation, we have set the terminal growth rate of 1% based on the long term GDP growth rate forecasted for the USA ( 50% of revenues ) and in keeping in mind the volatile nature of the industry Ubisoft operates in. For EBITDA Margin, Effective tax rate, Capex (as % of sales), D&A (as % of sales), we have taken an average of the past 4 years of financial data.
• Comparable company analysis shows that Ubisoft’s peers are trading high (median PER in year 2019 of 31,76 on the companies chosen). Ubisoft ratios are slightly under those of its competitors but remain in line with them. The pool is made of representative companies with a wide range of revenues and international just like Ubisoft. Those firms are either from the USA or from Europe. Using EV/EBITDA LTM ratio with the median of the pool, we find a potential upside of 14% to current share price, meaning the share price is undervalued relatively to its peers.
• Our final 12-month €95.27 price target is based on a 50:50 DCF:Comps. €101.2/shr and €89.3/shr from Comps.
INVESTMENT RECOMMENDATION
• We set a hold recommendation for Ubisoft stock, despite a 12-month target price of €95.27 vs €79.66 currently.
• Ubisoft is operating in an increasing market with a 12.9% CAGR, that may seem to be a great catalyst to invest in such a company. But since Ubisoft’s CAGR is lower, as we said before, we may be resilient on giving a buying recommendation for Ubisoft within this particular time frame.
• Ubisoft’s business is quite steady without too many risks, producing every year almost the same popular successful games. Yet, according to us, the company is one step behind its competitors and tends to follow market trends with a delay (Asian growth, mobile games) rather than anticipate them, hence heavy R&D expenses to catch up with its peers, and repositioning. From this perspective, we think that Ubisoft will underperform its competitors, even though we remain bullish on its share price evolution due to investor’s appetite for the gaming market.
• This year can still have somehow a good effect for Ubisoft (even though its sales growth is decreasing compared to the market). The release of new consoles is a known boost for early sales, and the release of Rainbow Six Quarantine can be very well appreciated by the community. That was somehow regained by Ubisoft after the release in those last days of Assassin’s Creed Valhalla that had a big success in its first days.