Summary
Our analysis of Netmarble’s IPO was that it was “priced for perfection”. While the Lineage 2 game releases has been near perfect in Korea and Japan, its release in the USA has been a bust and the release in China is on hold due to geopolitical tensions.
As a result, we predict that Netmarble’s stock will fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW once the revenue impacts of the USA and China releases are fully understood by investors.
Netmarble’s IPO Valuation: Priced for Perfection
On May 11, 2017, Netmarble Games had an IPO on the Korea KOSPI stock exchange.
Due to an enthusiastic demand by Korean, International, and Sovereign funds, the company was able to price the IPO at the high end range of 157,000 Korean won (KRW) per share, or approximately $138 USD per share based on an exchange rate of .00088 KRW / USD.
Three days before trading began, analyst Moon Ji-hyun with the Korean brokerage house of Mirae Asset Daewoo predicted that the company would exceed expectations for YoY revenue and profit doubling. She gave the stock a price target of 200,000 KRW, or a 27% increase from the IPO price.
Most other financial analysts and business reporters wrote positively about the company and its IPO.
Within the first hour of trading, individual retail investors pushed the price up to 171,500 KRW. The stock closed the day at 162,000 KRW, making the funds, the underwriters, the company and its CEO Bang Jun-hyuk very happy.
We alone differed. (Disclosure: we have never held a position in the stock and do not intend to initiate one at anytime. We have not received any remuneration for our articles on Netmarble.)
Three weeks before the IPO, on April 18, 2017 we analysed the offering and estimated that Netmarble’s post-IPO forward price sales ratio would be 4.3. This was based on FY17 YoY reported sales forecasts of a revenue doubling — largely driven by its newly released game Lineage 2: Revolution.
We found that Netmarble’s post-IPO valuation exceedingly high by both South Korean and Western standards for mobile game companies.
For example, we calculated the current price sales ratio of the very successful Korean mobile game company Com2uS at only 2.6. We also calculated the market-derived current price sales ratio of King Digital at only 3.08 based on what Activision Blizzard paid to acquire King in 2015.
Netmarble’s 2017 Performance
Our assessment in April 2017 was that Netmarble’s IPO was “priced for perfection” based on a forward price sales ratio of 4.3. We wrote another paper in May 2017 predicting that the stock would fall 33% from the IPO price to around 105,000 KRW once investors realized that Netmarble’s 2017 sales would fall short of expectations.
To Netmarble’s credit, its performance has been near perfect in the Korean and Japanese releases of Lineage 2. After a couple of months of drifting downward, the stock has recovered 47.8% from a low of 127,500 on August 11, 2017, largely due to the strong Japanese release.
On November 15, 2017, Netmarble released Lineage 2 in United States. Our assessment is that the release is a bust as games destined to be long-lasting hits in the USA usually crack the Top 10 iOS revenue rank on the App Annie charts within weeks of release. The game has now sits at revenue rank #30 which we estimate translates to an annualized run rate in the neighborhood of $75 Million.
Below is the App Annie USA iOS revenue rank chart for Lineage 2:
The stock market has yet to factor in Lineage 2’s bust in the USA.
Also, the 2017 scheduled release of the game in China has been delayed due to geopolitical tensions between the two countries.
Below is a summary of Netmarble’s game performance in 2017 to date:
While Netmarble’s 4th quarter revenue figures should be at an all time high due to the successes of Lineage 2 in Korea and Japan, we forecast that Netmarble will miss analysts’ full year sales estimate of $2.3 Billion (2.5 Trillion KRW), or a revenue doubling, by 14.8%.
We do not believe that the revenue impacts of the failed USA release and delayed China release are fully understood by investors. The realization that Netmarble will fail to meet full FY17 revenue doubling forecasts should cause a compression in Netmarble’s IPO valuation multiple of 4.3 times sales.
Assuming a more realistic multiple of 3.5, we predict that Netmarble’s stock will fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW within the next three months.
On May 11, 2017, Netmarble Games had an IPO on the Korea KOSPI stock exchange.
Due to an enthusiastic demand by Korean, International, and Sovereign funds, the company was able to price the IPO at the high end range of 157,000 Korean won (KRW) / share, or approximately $138 USD / share based on an exchange rate of .00088 KRW / USD.
Within the first hour of trading, individual retail investors pushed the price up to 171,500 KRW. The stock closed the day at 162,000 KRW, making the funds, the underwriters, the company and its Chairman Bang Jun-hyuk very happy.
Three days before trading began analyst Moon Ji-hyun with the Korean brokerage house of Mirae Asset Daewoo predicted that the company would exceed expectations for YoY revenue and profit doubling. She gave the stock a price target of 200,000 KRW, or a 27% increase from the IPO price.
Most other financial analysts and business reporters wrote positively about the company and its IPO.
We alone differed. (Disclosure: we have never held a position in the stock and do not intend to initiate one at anytime. We have not received any remuneration for our articles on Netmarble.)
Three weeks before the IPO, on April 18, 2017 we analysed the offering and concluded that IPO was “priced for perfection” meaning that the expectation of $1+ Billion USD in annual revenue from its newly released game Lineage 2: Revolution (L2R) was already built into the IPO price.
Below is a spreadsheet that summarized our prior analysis:
During the first two weeks post-IPO, three “imperfections” cropped up and the stock fell 9.6% from its IPO price to close at 142,000 KRW on Friday, May 26, 2017.
First, on the first day of trading on May 12th, a report surfaced that the Korean gaming authorities would not let minors play L2R until the company reduced the use of gambling (“gatcha”) mechanisms.
Second, three days later on May 15th it was reported that NCSoft, a rival Korean game company that created and owned the Lineage IP, planned a June 2017 release of a new game based on the same IP as Netmarble’s L2R. The fear was that NCSoft’s new game would draw users away from Netmarble’ s L2R.
Finally, a week later on May 17th, the stock suffered a one day slide of 7.8% from 157,000 KRW to 142,000 KRW despite booking a 111% and 172% YoY increases in sales and profit, respectively, as revealed in its 1Q17 earnings report.
The negative reaction by the stock market to these seemingly stellar financials is exactly what we predicted a month ago when we said that Netmarble’s IPO was priced for perfection at 157,000 KRW.
The market has confirmed our conclusion that Netmarble must book YoY revenue increases that EXCEED 111% if the stock is to move significantly past the IPO price.
Below we will present updated app store data confirming our prior prediction that the annualized revenue run rate (ARR) of Lineage 2: Revolution has fallen significantly since its late December 2016 release.
While still an impressive hit, L2R’s revenue in Korea for 2017 will not be $1+ Billion, but more like $600 MIllion.
We predict that the release of Netmarble’s 2Q17 financials, which should happen around August 17th, will confirm a less than doubling of YoY revenue. We predict that market will react negatively to that reality-check and the stock should be settle in around 105,000 KRW or 33% below the IPO price.
In the meantime, expect business reporters and financial analysts to continue to issue positive forward looking statements regarding the release of L2R in Japan and China, TV spots featuring Korean teen idols promoting L2R, new game releases in Korea, and hints of acquisitions in the USA and Europe.
Expect a number of one day pops in the stock following such announcements followed by a continued downward drift.
For example, on Monday May 29th, the stock popped 3.5% late in the session based on a favorable report by Lee Min-a, an analyst with KTB Investments and Securities. She downplayed the possible negative effects of the ban on playing L2R by minors and the NCSoft’s impending release of a game with similar IP.
The analyst reiterated a “buy” recommendation with a price target of 157,000 KRW, exactly the same as what funds paid for the IPO. To our way of thinking, this would be troubling to IPO investors.
This price target implies that the underwriters allowed the IPO to be price so high that brokerage analysts now admit that they see NO UPSIDE POTENTIAL for early investors for the remainder of 2017.
We suggest that you ignore all forward-looking statements coming from business writers and brokerage house financial analysts. Instead we recommend you follow real revenue trends in L2R and other Netmarble games that are freely available from such analytics companies as App Annie.
Also check around the 27th of each month to see if L2R is still among SuperData’s Top 10 global revenue ranking companies. The month that L2R falls out of the SuperData’s Top 10 will be strong confirmation of our negative prediction that the stock is headed toward 105,000 KRW.
App Store Evidence of Fading Revenue for Lineage 2: Revolution
On December 13, 2016 Netmarble launched a mobile role-playing game called Lineage ll: Revolution (L2R) based on licensed IP from NCSoft’s legendary PC game Lineage. According to app analytics company App Annie, the game immediately rose to #1 on the S. Korean iOS Apple revenue rank charts and has remain so to this day with the exception of two days in late May.
Just because L2R has remained ranked #1 on the S. Korean charts for the past four months, and likely will continue to do so for months, it is still possible that ARR has declined by $100s of Millions since release.
This is because there is a severe power function relation in the mobile game industry between ARR and revenue rank. Typically, at the top of the USA charts, there can be a $600 Million difference between the #1 and #2 ranked game, say $2.2 Billion ARR for #1 and $1.6 Billion ARR for #2.
For example, below is a power function we derived in an earlier paper on the Netmarble IPO for top ranked games on USA iOS app store.
For the S. Korean chart now, it is conceivable that the gap between #1 ranked L2R and the #2 ranked Everybody’s Marble, also by Netmarble published on Kakao, could be $700 Million or more.
In January 2017, Netmarble told the Korean press L2R generated $176.6 Million in revenue between mid-December 2016 and mid-January 2017. That translates into $2+ Billion ARR.
Obviously, a $2 Billion ARR is not sustainable for the full year of 2017. This is because, TOTAL Korean game revenue (mobile + console + PC) was only $4 Billion in 2016, according to Newzoo.
Netmarble has not made any official full year forecasts for L2R nor for the company as a whole. We do know that official 2016 revenue for the total company was $1.34 Billion.
In March 2017 analysts covering the company told The Korea Times that they expect revenue to double to $2.7 Billion, largely based on the early success of L2R. Assuming organic growth of around 25%, the implied 2017 forecast for L2R is around $1 Billion.
We present two pieces of evidence that even a $1 Billion in total revenue for 2017 is unlikely.
The first piece of evidence is an App Annie trend chart showing L2R download rank. Note that while L2R was ranked #1 in downloads for the first month since release, downloads have steadily dropped below #40 by late May 2017.
It is doubtful this drop off was caused by a drop off in advertising by Netmarble. It is more likely due to a lack of strong word-of-mouth by early players that this is a great game.
The other piece of evidence of a drop off in ARR comes from a monthly summary report put out by SuperData listing the top grossing mobile games globally for that month.
For February 2017, SuperData reported L2R was the top grossing game globally. But, for March, it reported that L2R dropped to #10. In April, it moved up slightly to #9 (See below).
L2R is no longer $2+ Million USD ARR game of January 2017 nor the $1+ Million USD ARR game of February 2017. More likely, its March and April ARR is in the range $600 Milion USD.
Valuing Netmarble Based on Realistic Expectations for L2R
At the IPO price of 157,000 KRW or $138 USD, the company was valued at $11.7 Billion USD.
Dividing that valuation by analysts forecasts for 2017 revenue of $2.7 Billion, we arrive at valuation of 4.3 time forward ARR. This ratio enables comparisons with market-derived valuation ratios of publicly-held companies. (see below)
For example, in another paper of ours on the Netmarble IPO, we derived a Valuation ratio for Com2uS of 2.61. Com2uS is a Korean-based mobile game company listed on KOSPI exchange. Com2uS is much better known than Netmarble due to its global hit mobile game Summoners War.
While Com2uS is growing slower than Netmarble, its future sales is more predictable. Based on this comparison, we concluded that Netmarble’s IPO was overpriced by 26%.
In the spreadsheet below, we also break down Netmarble’s 2017 overall revenue growth forecast into estimates of organic growth versus new sales from L2R — which we peg at $1 Billion.
The final spreadsheet presents “what if?” analysis of Netmarble’s value and stock price if L2R’s 2017 revenue is $600 Million instead of $1 Billion.
Note that when revenue forecasts are significantly cut back, there is usually a corresponding compression in valuation ratios. So, we built into our “what if?” analysis a compression of Netmarble’s valuation ratio from 4.3 to 3.5 times forward ARR.
We predict that the release of Netmarble’s 2Q17 financials, which should happen around August 17th, will confirm a less than doubling of YoY revenue. We predict that market will react negatively to that reality-check and the stock should settle in around 105,000 KRW or 33% below the IPO price.
Netmarble is the ninth largest mobile app game publisher in the world and the largest in South Korea. In a month, the company is set to raise $2.3 Billion via an IPO on the KOSPI Korean stock exchange.
If successful, the company will be valued at $11.7 Billion and catapult it to the level of Supercell and MZ (formerly Machine Zone) as one of the top 3 most highly valued mobile game companies in the world.
Our analysis of this IPO, indicated that expectations for revenue doubling in 2017 has been fully priced into the IPO price of 157,000 Korean Won / share or $138 USD / share (based on conversion of .00088 USD / Won). We recommended staying away from the IPO, and look for an entry point 36% lower, or around $86 / share USD.
While doing research on Netmarble, we began to see that the aggressive pricing of its IPO was not the only instance of what we considered to be a pattern of greed as defined by making choices favoring short term gain at the expense of long term gain.
For one, Netmarble had a history of overworking its Korean workers. So much so that employees pulling “all nighters” before every game patch started calling its highrise HQ in Seoul “the lighthouse”.
As Netmarble’s IPO date grew nearer and investor scrutiny intensified, the company changed its work hours policies, saying it would ban “all nighters” and weekend work.
The purpose of this paper is to explore in detail another instance of Netmarble greed: how it has managed a recent $710 Million acquisition of the Vancouver studio of the fallen USA mobile game unicorn Kabam.
Netmarble has repeatedly stated that its long term growth strategy hinges on growth outside S. Korea. This includes localizing its Korean hit game Lineage II: Revolution for the Chinese market. It also includes acquisitions of studios in the West with games generating $100+ Million in annualized revenue (ARR) like Kabam’s Marvel: Contest of Champions (MCOC).
Our interest in Netmarble stems from a long running interest in Kabam. We have followed the the ups and (mostly) downs of Kabam for the last three years, focusing mostly on valuations based on App Annie app store revenue rank trends. Below is a list of our articles chronicling the fall of Kabam and its causes. They are available on our blog GloMo Investing:
On October 18, 2016, VentureBeat reported that an unidentified company had made an $800 million offer for Kabam’s Vancouver studio. That studio had been responsible for the only game keeping Kabam alive at the time: Marvel: Contest of Champions (MCOC).
The Vancouver studio also was valued for the game engine behind MCOC and for the hit potential of another game in final development based on Transformer IP licensed from Hasbro. At the time, MCOC was a #9 revenue ranked game with our estimated global annualized revenue run rate (ARR) of $250 Million. We noted at the time that the bid seemed right for a studio + hit game + game engine as long as the two-year running MCOC could sustain a $250 Million ARR.
On December 19, 2016, it was announced that Netmarble was the successful bidder. The bid was later officially pegged at $710 Million based on Netmarble’s IPO filings in late March 2017.
Throughout 2016, Netmarble talked about an IPO. It played up its plans to use the proceeds from the IPO to buy USA-based companies knowing that the mobile game market in the USA was six times that of S. Korea. It was especially important for Netmarble to demonstrate its acquisition prowess before its IPO, given that it had narrowly lost a bid for the social casino game company Playtika in June 2016.
What follows is a closer look at the way Netmarble has managed two major software releases since it closed the deal for the Vancouver studio just two months ago. It is evidence of a kind a greed that favors short term monetization over long term player engagement.
The first instance of a disastrous release — the now infamous MCOC Patch 12.0 — was released on March 1, 2017 just one week after Netmarble closed the acquisition on February 23, 2017. The other was the design and release schedule of Transformers: Forged to Fight (Transformers).
Even though development of both started before Netmarble took over, the final releases were made on their watch. Netmarble could have stopped these releases, mandated more player friendly designs that would sustain engagement even if that meant less revenue in the short run. But they did not.
Using the AppAnnie iOS USA app store revenue rank trend line below, we will show the context and likely rationale for MCOC Patch 12.0.
MCOC was first released 2 ½ years earlier in December 2014. Five month later in May 2015 the game cracked the Top 10 revenue rank (first red line).
It remained a consistent Top 8-10 revenue rank for a solid year until July 2016 (second red line) when it started a slow fade down to a Top 10-15 for the second half of 2016. Patch 12.0 went live on March 1st (third red line).
Player criticism was instantaneous led by a YouTube video entitled “Patch 12.0 is Terrible” by MCOC Youtube channel celebrity Seatin Man of Legends. It quickly spread. On March 6th, the MCOC development team issued an official apology, said it heard the criticisms, and would issue a fix shortly. Note that on the day of the apology (fourth red line), MCOC broke below #20 first time in two years.
Here is a more detailed App Annie chart for the last year that shows MCOC fade starting in mid-2016:
MCOC Fade from Top 8-10 To Top 10-15
You might think that a slight fade from a consistent Top 8-10 revenue rank game to a Top 10-15 game is insignificant. But, in the mobile game world, there is a strong power function relation between revenue dollars and revenue rank.
At this high end of the mobile game power function a single digit swing in revenue rank translates into a $20 Million to $40 Million swing in ARR. Using our long-standing metric of 2.5 times ARR for valuing mobile game companies or studios + game engines, a one digit swing in rank translates into a $50 Million to $100 Million swing in valuation.
Below is our reconstruction of global annualized revenue of top ranking games currently on the iOS Apple app store charts as a function of rank. The iOS USA numbers are from Think Gaming, which we believe are algorithmically derived and smoothed out rather than actual tallies.
Over the years, we have used this simple rule of thumb to derive global revenue of top ranking games on Apple iOS USA — companies that generally derive the bulk of their revenue in the USA as opposed to Asia or Europe.
The global mobile game revenue for top ranking USA iOS games can be divided into three equal segments: iOS USA, Android USA, and Rest of World. Thus, global ARR = 3 * iOS USA.
Notice that the average ARR of Top 8-10 game is $242 Million whereas the average ARR of a Top 10-15 game is $156 Million, about $100 Million less in revenue and $250 Million less in value based on our 2.5 valuation multiple.
Obviously Kabam was acutely aware of MCOC’s fade and its implications for the value of the Vancouver studio. Also, Netmarble must of been aware when it turned its eye to Kabam after its June 2016 failed bid for Playtika.
Given the extent of the changes involved in Patch 12.0, the development team must have began work about two months after the start of the fade, say around August 2016. As Kabam and Netmarble were closing in on a deal, Kabam must have discussed Patch 12.0 with Netmarble including design choices based a trade-off between increases in average revenue per paying user (ARPPU) and the likelihood of player defection.
Kabam may even have been savvy enough to prepare several versions of Patch 12.0 with different expected ARPPU knowing that it would be Netmarble who would make the final decision once the deal closed. Normally, before a major update to a long running game, it is customary for a development team to do two things:
Netmarble did neither. On March 1st, the final version of Patch 12.0 was released.
There was an immediate shock and outrage by hard core players as evidenced by their vents on YouTube, Facebook, Reddit, various game blogs, and official Kabam hosted forums. Among long running hard core games, the level and breadth of MCOC player outrage was unpresented.
When we googled “player revolt” plus game name, we could find evidence only of one revolt by players of MZ’s Game of War: Fire Age. There have been no noticeable online revolts by players of Supercell’s hit games — Clash of Clans or Clash Royale — nor of players of MZ’s other hit game Mobile Strike.
Based on our reading of these criticisms, we believe that final version of Patch 12.0 was focused to the extreme on increasing ARPPU without giving much weight to player outrage and defection.
First, beyond the questions of objective, there was a major screw-up of core gameplay mechanics that made block and parry unplayable.
Then, there was what we call widespread “devaluations” of player assets designed to increase ARPPU.
It included diminishing the fighting power (“nerfing”) of the most popular characters, or Champions, and providing incentives to buy unpopular Champions by increasing their power (“buffing”).
Another devaluation occurred by making battle losses more costly in terms of power loss, thereby increasing regeneration costs. Finally, there was fundamental change in the scoring system with no rationale given. But it appeared to the most experienced players that this change was designed to increase ARPPU.
Player outrage and talk of organized revolt ended abruptly on March 6th when the company officially apologized and promised rollbacks which did occur with Patch 12.0.1 on March 10th.
In the end, Patch 12.0 and subsequent roll-back likely did nothing to reverse the fade of MCOC. But it caused irreversible loss in trust by long term players. Players can never again be sure that accumulated investments made in MCOC won’t be subject to another Patch 12.0 type devaluation. MCOC will never again be a consistent Top 8-10 game.
Netmarble will likely hold off from making ANY major changes in the next six months to MCOC, leading to player ennui and defection to more engaging games.
Now on the the other instance where Netmarble’s greed led to decisions which caused a new game release by the Vancouver studio to be a bust. Kabam’s Vancouver studio was especially valuable to any acquirer because it had a proprietary “game engine” called “Fuse & Sparx” thought to be capable of churning out a series of re-skinned MCOC hits.
First up was a game with MCOC-like game mechanics based on Transformers IP licensed from Hasbro called Transformers: Forged to Fight. (Transformers) Below is the countdown to the global launch of the game:
Notice that there was only a two month soft-launch before global release. Based on App Annie charts, the game struggled in soft-launch and never cracked the Top #100 with any consistency.
Normally, a company would add a couple more months of tweaking before making a decision to launch officially or can the game. Given Netmarble’s May 2017 IPO date, we think that they rushed released a deeply flawed Transformer game causing it irreparable damage as the early word was that it was buggy, slow to load, and freezes.
Even if the game’s bugs could be cleaned up, early players of the game reported that it is “too complex to play” and there is “kitchen sink” approach to development with a mashup of game genres and a mind-numbing complexity to scorekeeping and purchasing.
To us, this suggests that the priorities were early monetization over long term player engagement. Below is the revenue rank trend of the game:
Our four years of reading App Annie charts suggests that there are no more “late bloomers” in the mobile game world. If a newly released game does not crack the top 50 in the first few days, it will never crack the Top 10. The Transformer game is a major bust for Netmarble.
But worse, it raises doubts about the hit making ability of Vancouver’s game engine “Fuse and Sparx.” Could the success of MCOC be due more to the original team that developed it, long since gone, and not its game engine nor the current team?
The bust of the Transformer game and the fiasco of MCOC Patch 12.0 raises serious doubts about Netmarble’s ability to manage future acquisitions in the West.
Will Netmarble’s greed once again force newly acquired companies in the USA to release their own Patch 12.0?
Will Netmarble’s greed force acquired companies in the USA to junk up games similar to what happened with Transformers: Forged to Fight?
Netmarble’s IPO will give the company $2.4 Billion to make acquisitions of USA-based companies with current Top 20 hits. This would include the privately-held companies Pocket Gems, Product Madness, and Jam City, a company already with a $100 Million Netmarble investment.
It would also include the publicly-held company Glu Mobile and the Com2uS, a company listed on the Korean exchange, but with most of its revenue coming from its global hit Summoners War.
Unless Netmarble can change its focus to long term player engagement over short term monetization boosts, we think that they will destroy future acquisitions just like they destroyed Kabam’s Vancouver studio in two short months.
Netmarble is the ninth largest mobile app game publisher in the world and the largest in South Korea.
The company is seeking to sell 17 million shares on the Korean KOSPI stock exchange in early May garnering proceeds of between $1.8 Billion and $2.4 Billion USD (all USD figures converted from Korean Won at .00088 USD / Won). Roughly half will be used for new acquisitions and half will be used to retire debt.
This is a big deal IPO by both Korean and USA standards.
It represents the largest IPO in S. Korea in 7 years. It would rank as the one of the largest tech IPO globally in last 2 years.
In January 2017, Netmarble launched a mobile role-playing game called Lineage ll: Revolution based on licensed IP from NCSoft’s legendary PC game Lineage. According to app analytics company App Annie, the game immediately rose to #1 on the S. Korean revenue rank charts.
Netmarble told the Korean press that the game generated $176.6 Million in revenue in the first month. That translates into an annualized revenue run rate [ARR] of $2+ Billion.
Obviously, that run rate is not sustainable. But, even if the game managed to produce $1+ Billion in revenue during 2017, it would place Netmarble in the rarefied company of Niantic, Supercell and MZ (formerly Machine Zone) as the only companies that released a $1+ Billion Dollar game in the last 2 years.
The IPO will be watched closely by the mobile game industry given the poor post-IPO performances of King Digital Entertainment in 2014 and Zynga in 2011.
A case could be made that these IPOs were anomalies and not a fair test of how a mobile game stock is capable of performing. Both Zynga and King Digital had enough numbers in their S-1s to suggest that their best days were behind them at the time of their IPOs.
However, there is absolutely no question that Netmarble’s best days are ahead of it. There is no question that its revenues and profits will soar in 2017 if Lineage II manages to sustain an ARR greater than $1+ Billion.
Lineage II is not all that Netmarble has going for it in 2017. In February 2017, the company completed a $700+ Million acquisition of the Vancouver studio of the USA mobile game company Kabam.
If managed properly (questionable as we will argue below), Netmarble could generate a fresh $100 to $300 Million in revenue from two Kabam game. One is Marvel: Contest of Champions which has been a long running Top 15 revenue rank game in the USA. The other is the recently released game Transformers: Forged to Fight based on IP licensed from Hasbro.
No question, 2017 will be a spectacular year for Netmarble. The Korea Times has reported that analysts there expect Netmarble’s forward 2017 revenue to be around $ 2.7 Billion, a whopping 107% YoY increase. This is a far cry from Zynga’s and King’s anemic post-IPO YoY revenue growth rates of 12% and 20%, respectively.
The question is has all of this been priced into Netmarble’s IPO price and valuation?
Our analysis will show that expectations for revenue doubling in 2017 has been fully priced into the IPO. Netmarble’s IPO is priced for perfection.
Furthermore, there is a pattern of greed on the part of Netmarble’s management that has not served it well. It includes:
While Netmarble’s short term prospects are tied to the performance of Lineage II in Korea, its long term prospects are tied to success in the West.
The company has announced that it intends to localize and release the Lineage game in China but those prospects are uncertain, even with Tencent (TCEHY) as a significant minority stockholder.
The uncertainty is result of China’s recent freeze on licensing new games from Korean companies due to geopolitical tensions between the two countries.
In our opinion, Netmarble’s greedy handling of the Kabam games causes us to believe that Netmarble’s current and future acquisitions will underperform due to employee and player defections.
We start with a summary of the IPO — the expected price range, and the expected post-IPO valuation based on those prices.
The next spreadsheet is our valuation of Netmarble as a multiple of 2017 forward sales. We have been unable to find any official company forward looking revenue statement. If there is one in the Korean version of their S-1, we have found no reference to it by the Korean financial press.
Lacking official numbers, we use $2.7 Billion for Netmarble 2017 forward sales, a number reported by The Korea Times that analysts there expect.
Any lesser number would only increase our estimated price / forward sales ratio (P/S), which is already high. Any greater number would be incredulous as Newzoo has reported that TOTAL Korean game revenue (mobile + console + PC) was only $4 Billion in 2016.
Moreover, given the $4 Billion Newzoo figure, it seem incredulous that there would be enough demand in Korea to sustain any single mobile game at an $1+ Billion ARR.
The next spreadsheet is a comparison of the valuation / forward sales (P/S) ratios of Netmarble — 3.3 — with Com2uS — 2.61.
Com2uS is a Korean-based mobile game company listed on the Korean KOSPI exchange. Gamevil, a smaller publicly-held Korean game company, holds controlling interest in Com2uS.
Com2uS is much better known in the USA than Netmarble due to its global hit mobile game Summoners War. The game was released in the USA in June 2014 and has maintained a remarkably consistent Top 20 revenue rank in the USA for the last two years.
Based on this comparison, we believe that Netmarble’s IPO is overpriced by 26% at its announced price range of $106 to $138 USD or 121,000 to 157,000 Korean Won.
We believe that it would be a buy only around $84 USD or 95,250 Won.
You might argue that Netmarble’s upside potential is higher than Com2uS. That is true. But, we are not talking about financials, but stock prices whose movement is based on perceived and actualized performance that has not already been built into the current prices.
Netmarble is a buy at the announced IPO range if you believe that it will exceed an expected 107% in revenue growth this year. We think not.
Netmarble is a buy if you think it can successfully localize and release the Lineage II game in China in late 2017 or 2018. We say wait a half year before you invest to get a better feel for geopolitics between S. Korea and China.
Finally, Netmarble may be a buy if you believe that the newly released Transformer: Forged to Fight game will become a Top 8-10 hit like its cousin Marvel: Contest of Champions. We think not.
Our four years of reading App Annie charts suggests that there are no more “late bloomers” in the mobile game world. If a newly released game does not crack the top 50 in the first few days, it will never crack the Top 10.
Our reading of the App Annie chart says that the Transformers game is a bust.
(Source: App Annie)
While the Transformer game began development under Kabam, the final architecture and release schedule came under Netmarble’s watch. Both reflect a greediness that we believe has resulted in its quick bust.
The game was rushed into global release on April 5th after a relatively short two month soft-launch shakedown in Singapore and Canada.
Experienced early players of the game report that it is “too complex to play” and there is “kitchen sink” approach to development with a mashup of game genres and a mind-numbing complexity to scorekeeping and purchasing. To us, this suggests that the priorities are early monetization over long term player engagement.
In sum, Netmarble in not a buy at the announced IPO price range. Wait at least six month and evaluate its performance then.