Ubisoft stock could be about to experience tailwinds from new console releases, network effects from a boom during covid its new ownership of Star Wars games.
Ubisoft is a leading French video game company with a market capitalization north of $8 billion. You might know it from game like Assassin’s Creed, Prince of Persia, or Just Dance. The stock is reaching its 52-week low of $61.20 and is exhibiting some intriguing patterns as illustrated in the chart below.
On a five-year scale, Figure 1 points to Ubisoft’s recent fall from grace but much more too. Using a Fibonacci retracement tool, we indicate the stock retracted exactly half of its rally from October 19 to January 21st and further below, we present some points on why the stock could turn higher coming out of the pandemic-era.
Figure 1: Ubisoft retracts half its rally from October 19 to January 21st
Ubisoft’s relationship with consoles and PC manufacturers
Ubisoft produces top selling games like 2nd highest grossing Assassin’s Creed: Valhalla, and 4th highest grossing game Watchdog for Xbox, PlayStation, PC and Switch. In recent years, the company has adapted well to the changing console landscape and diversified its product offering to capture more players. What this diversification signals is that Ubisoft is correlated to companies like Microsoft and Sony doing well. New console launches mean new opportunities for game releases. Considering next generation consoles PS5 and Xbox series X came out in November, Ubisoft could see tailwinds.
According to a recent report by Bank of America Global Research, Microsoft expects 40% year over year hardware revenue growth especially as we enter Q2. The second quarter has historically been accompanied by a surge in console demand for Xbox shipments which means complementary goods (video games) from Ubisoft could also see a rise in demand. While Ubisoft has diversified away from Xbox, it could see its bottom line remunerated from this launch.
Figure 2: Ubisoft diversifies its sales channels with PC and PlayStation leading
Ubisoft exits record year with much to look forward to
It would be unfair to Ubisoft to omit some key performance indicators just because of a recent share price slide. In fact, the company displayed strength with record Q3 sales of $1.2 billion doubling year over year in 2020. Its game Rainbow Six Siege now has 70 million active players 15 million of which were added in 2020. For a game started seven years ago to see this sort of popularity is a sign of quality and adaptive business operations. Furthermore, this engagement is good news and could harness a prolonged network effect for Ubisoft products going into 2021. Moreover, a recent trend shows that users are looking for longer term games, not just blockbuster ones. Ubisoft recently showed that its back-catalog games have seen a surge in demand, thus confirming this trend.
Beyond games, Ubisoft has been recognized for its ESG quality and was awarded with the prime ESG status. This a huge deal for long term success as capital flows into ESG funds have surged this year. Lastly, following in the footsteps of Take-Two, Ubisoft’s closest rival, the firm has been discussing the option to raise prices to $70—this type of price command, if demand is inelastic enough, could help Ubisoft increase revenues, but would most likely show a decreasing number of sales. In other words, if this strategy is implemented, do not worry if sales drop, just make sure revenues are rising.
Figure 3: Ubisoft breaking past its previous $800 million quarterly high
Stealing the show from Electronic Arts
Recent news have indicated that Ubisoft has stolen the show from Electronic Arts by striking a new deal with Lucas Films Studios’ Star Wars franchise. The top three highest grossing film franchises as of November 2020 included Marvel, Star Wars and James Bond. This is a proxy for the potential impact developing a Star Wars universe could have on Ubisoft’s bottom line. In fact, Star Wars Jedi: Fallen Order, published by Electronic Arts, represented 6.5% of the total installed base on Xbox in 2020 right behind the infamous game Fortnite. If the Star Wars universe Ubisoft builds sees success, similar figures could be replicated and see Ubisoft’s return on investment grow.
Figure 4: Star Wars is the second highest grossing movie franchise, a proxy for video game success
What to know regarding Ubisoft’s recent price depreciation
Ubisoft outpaced its expected earnings during the pandemic, but in its latest February earnings call, executives lowered expectations for future earnings going into 2021. This was one of the main reasons for a slide in share price
Ubisoft is both unprofitable and used to high debt levels according to its balance sheet. Its net debt to EBITDA ratio however signals that it should not encounter too much trouble reimbursing its debt. Recently, the company successfully raised EU600 million through bond issuance roughly around the 7/8 coupon mark, which according to a press release was five times oversubscribed. This level of oversubscription in a corporate bond could indicate that investors are forward looking on the company and believe it stable enough to pay them back over the seven-year maturity horizon.
While Ubisoft is in a favorable position to manage its debt, the balance sheet indicates EBIT declined 9.0% over the last year, and if that is not cleared up, could prove to be unsustainable.
Lastly, Ubisoft is not the only large player in the space and sees fierce competition from the likes of Blizzard, Nintendo, Electronic Arts, and new entrant Roblox. Nonetheless, Ubisoft remains a household name in the gaming business.
Figure 5: Ubisoft faces competition from Roblox and household top dogs Blizzard, and Nintendo.