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Mixi: A Rare Undervalued Mobile Gaming Stock

Lawrence Abrams No Comments

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Mixi (2121:TYO) had been the Japan’s leading social network site until Facebook started to take over.

In January 2011, Facebook had 2 Million monthly average users. By September 2012, it had surpassed Mixi with 15 Million monthly users and Facebook never looked back.

As a result, Mixi’s stock has been in a 5 year tailspin falling 86% from 8,540 JPY in December 2009 to a low of 1,190 JPY in November 2013.

But, out of nowhere, this social network company developed internally a Monster (literally) mobile game hit called  Monster Strike (MS). And the stock started to move from November 19th at 1,190 JPY a share to close at 9,060 JPY a share on December 10th for a 661% gain.

Reuters chart

(Source:Reuters)

But, before the stock opened on December 11th, Reuters reported that Goldman Sachs cut its rating on Mixi’s stock to “sell” from “neutral”.

Since the Goldman downgrade, the stock has been rocky. There was a 19% move on February 13th when the company revised upward by 44% its FYE2014 (ending March) revenue guidance from 8,000 M JPY to 11,500 M JPY. But that did not last. The stock today sits at 5,550 JPY a share.

I believe that Mixi’s stock is undervalued because it does not fully reflect the FYE2015 revenue of Monster Strike.

Mixi will be reporting its FYE2014 (March ending) on May 15th. It will also give its first guidance for FY2015 revenue. I have derived my own estimate of FYE2015 revenue which fully takes into account the revenue implications of MS now a megahit at #3 on the app store charts.

Implied by my estimate of FYE2015 revenue is a forward price/sales (P/S) ratio is 2.51. At the very least, Mixi’s forward P/S ratio should be equivalent to GungHo (3765:TYO) which I have estimated at 3.50. This translates into a stock price for Mixi of 7,662 – a 39% gain over its current price of 5,550 .

Mixi is a buy now BEFORE its earnings and guidance report on May 15th, 2014.

I present below how I arrived at a forward P/S ratio for Mixi of 2.51 and why Mixi justifies at the very least forward P/S equal to GungHo’s 3.50.

Underlying my forward P/S estimate for Mixi is an estimate of the relation between app store revenue ranking and revenue. Data points on this graph are estimated game revenue associated with revenue rankings of the following 3 publicly held Japanese mobile game companies and their hit games:

(1) Mixi – Monster Strike (MS)
(2) GungHo Online – Puzzle and Dragons (P&D)
(3) Colopl (3668:TYO) – Quiz RPG:The World of Mystic Wiz

There has been publicly available data provided by analytics companies like App Annie that track daily app store downloads and in-app purchases of mobile gaming companies. (Disclosure: I have not received any remuneration from App Annie.)

With a free account, you cannot download any data. But, you can take screenshots of graphs of daily rankings (1-1000) of mobile games by downloads and revenue where revenue is the sum of download revenue + in-app purchases. These graphs can be filtered by app store – iOS Apple Store, Google Play, and Amazon – and by country.

App store data does not include revenue from advertising. But, mobile games created by professional studios tend to be free-to-play (ftp) with monetization via in-app purchases of addicted players. This is the case for all three games analyzed here.

In the 2013-2014 period examined, all three games derived almost all of their revenue from Japan. In Japan, app store revenue is roughly divided equally between iOS Apple and Google Play stores. We only show revenue ranking graphs from iOS Apple Store – Japan to save space because views of Google Play revenue rankings were about the same as iOS.

Mixi’s Monster Strike was released on September 27, 2013. Its early upward trajectory on App Annie revenue ranking charts was inauspicious, rising to a rank of # 93 on November 19th when investors first began buying Mixi’s stock in volume with the expectation that MS would continue to rise up the charts. (see first chart below).

An excellent blog post of how Monster Strike has saved Mixi has been writen by Dr Serkan Toto. Indie navi has also covered the Mixi story as extensively as any English language site.

Unlike P&D and Quiz RPG, MS was slow to become a megahit. MS started 2014 at #25 and took a run at megahit status in January, but then backed down in February. But, on March 1, 2014, a new release (2.2.0) coupled with 3 TV spots caused the game’s revenue rank to shoot up to #3 and MS has stayed there solidly since. (See second chart below).

Monster strike from release                                                   (Source: App Annie)

MS Jan - May                                                (Source: App Annie)

It is important to note that MS’s megahit status at #3 contributed only to one month of its FYE2014 financials. It has contributed only two months to what FY2015 might look like. This is in contrast to the understanding of what P&D has, or will mean, to GungHo’s financials and to what Quiz RPG has, or will mean, to Colopl’s financials.

GungHo’s Puzzle and Dragons raced up to #1 within days of release on February 20th 2012 and has remained #1 or #2 on the Japanese charts now for 24 months and counting. It joined Western chart-topping megahit  Candy Crush Saga as the only mobile games in 2013 qualifying for the “Billion Dollar Club”.

Puzzle and Dragon From Release                                                   (Source App Annie)

The rise of Colopl’s hit game Quiz RPG was slower that P&D, but faster than MS. It was released on April 22nd, 2013 and 5 months later in September, it cracked the Top 5. It remained a Top 5 game another 5 months, but now has slipped to a Top 10 game in March and April 2014.

colopl app annie                                                      (Source: App Annie)

colopl jan thru may 6(Source: App Annie)

Now that we have established each game’s revenue ranking and the duration of each game’s megahit status, the next step in our analysis is to make the connection between quarterly revenue ranking and revenue.

The easiest is GungHo’s Puzzle & Dragons. It has been an unwavering #1 for the Jan-March 2014 period  and GungHo has reported that in April 2014, P&D generated 11,526 M JPY ($113 M USD) or 46,104 M JPY for a quarter.  For our graph, we use 45,000 M JPY as the January-March quarterly revenue associated with this #1 app store revenue ranking game.

Next is Colopl’s Quiz RPG. Its revenue ranking has wavered in Jan-Mar 2014. It was a solid #3 in January, but has slipped in February and March to between #5 and #10. We give it a quarterly average of #5. Colopl’s mobile gaming revenue is more diversified, benefiting from another Top 10 hit called Professional Baseball – PRIDE. Roughly, Quiz RPG contributed 65% to its latest quarter revenue of 12,359 M JPY. Thus, a #5 app store revenue ranking in Japan is associated roughly with quarterly revenue of 9,000 M JPY.

Finally, based on where Monster Strike now stands in comparison to P&D and Quiz RPG, I present an estimate of Monster Strike’s contribution to Mixi’s 1Q2015 (Apr-June) revenue before it reports FYE2015 guidance next week.

I think that the relation between Japan app store revenue rank and revenue is not just a long-tail relation, but a “double long-tail” relation. There are wide differences in revenue between games with revenue rank #1 and #3.

MS as a solid #3 for a full quarter should contribute more that Colopl’s Quiz RPG estimated 9,000 M JPY and less than GungHo’s #1 P&D at 45,000 M JPY. I peg MS’ next quarter revenue at 11,250 M JPY — it closer to Quiz RPG as the data suggest “half-life” relation and we modeled it that way: #1=45,000 M JPY; #2=22,500 M JPY; #3=11,250 M JPY..

Graph between Revenue Ranking and Revenue

The final two steps are to present a comparison of the trailing and foreward P/S rations for Mixi, Colopl, and GungHo.

Trailing PS

 (Source: Reuters)

I think that 4 times last quarter’s sales is justified for GungHo by the fact there seem to be no near term upside potential. P&D has been #1 for 24 months and counting and can generate no additional revenue from its core market in Japan. GungHo has no other games in the Top 10.

P&D’s only upside is a successful introduction in China, but iOS Store and Google Play generate app revenue nowhere near the revenue generated by app stores in Japan and the United States.

Estimate of Forward PS

Of the three, Colopl is a most prolific internal developer and the most aggressive dealmaker with announced tie-ins with Glu Mobile and TenCent. Quiz RPG had been a solid #3 for five months until February 2014.

It has another Top 10 game in Professional Baseball – PRIDE. I think that the combination of a slipping Quiz RPG and a rising PRIDE will keep Colopl’s revenue flat for the next 3 quarters so using 4 times last quarter’s revenue as an estimate of forward P/S again seems justified.

Mixi’s revenue over the next year has the most upside potential of the 3 companies. MS has only been at #3 for two months and it looks solid. I estimated earlier a full quarter at #3 translated into approximately 11,250 M JPY. Couple that with Mixi’s existing jobs listing business, and I estimate next quarter’s (Apr-June) QoQ revenue increase of 140%.

Even if MS begins to fade in the second half, I have estimated Mixi’s full FYE15 revenue at 36,425 M JPY, a YoY increase of 200%. This implies a forward P/S ratio of 2.51, below that of GungHo’s 3.34. At the very least, Mixi’s P/S should be on par with GungHo.

That would imply a stock price value of 7,662 JPY, a 39% appreciation over its current (5-4-14) price of 5,550 JPY.

Mixi is a buy now BEFORE its earnings and guidance report a week from now.