Hey Guys,
I had some money open up as a certain used video game store stock started to become weird again and I can't take that kind of stress in my life and cashed out. Fidelity decided it would be good for me to sit on all my trades for two days since they put margin on the wrong account for me (free ride freeze). So I decided to try to find some plays that would potentially be value. One of them is a company who I bought a couple shares of at $18.55 and am considering if I should actually make a real investment into:
CD Projekt Red OTC: $OTGLY $OTGLF, WSE: CDR is a gaming company. Given the Demographic of Reddit, I am going to assume most of you know their story, but if not I will give a quick summary: You can go here for more information about the company
CD Projekt Red is a company that primarily creates Role Playing games (RPG). They are known for the Witcher series and the spinoff low tier esport Gwent, as well as the owners of GOG.com and recently released Cyberpunk 2077.....
Wait.
Cyberpunk 2077?? That disaster?
Yep, that's the company that created Cyberpunk 2077. If you pay attention to the gaming world at all, then you know that they have been in the news, and not in any good way. Many people were severely upset by the release and the amount of bugs that happened because of it. It was so underwhelming that it was hit with Several Class Action Lawsuits. and Them getting Hacked. None of this is good.
Looking at this, the question comes up: "Why would anyone want to dump their money into this company?" and the market would agree with you on this. $OTGLY has dropped from Its High of $31 on November 30, to $14 today. a 55% decrease and close to their 52 week low and with good reason. Now that I have given a bit of insight into the state of things, I am going to list out the bull and bear cases for the company, starting with the bear cases. Now I am also going to first go everything that is in the short term (the next 3-9 months) as I think this is where the risk is. I will list long term items down below, but I think this is more imperative:
Bear Case:
- Cyberpunk was a PR disaster - Cyberpunk was a game that promised everything, it was a game that some people thought would change gaming as we know it. what came out was not anything close to that If you want to listen to Angry Joe's review, here it is. Now, if the game was simply not great, I don't think it would have been much of a problem, but the problem was that the game was so buggy, especially on last gen consoles (Xbox 1 and PS4) that Sony stopped selling Cyberpunk on their platform. Suffice to say, the game was not what people thought it would be. This has created ill-will towards the company and I believe was part of the reason they were targeted with the hack. In my opinion, this is worse for the company's image than battlefront was for EA, this is because:
- CD Projekt had built their reputation to be a company that cared about integrity, that is gone for now at least and will cause massive headwinds for them moving forward - when the battlefront fiasco happened with EA, everyone knew that EA was a money grabbing piece of garbage org. Still Having the most downvoted reddit post of all time is impressive. CD Projekt's image was so much better than EA's before this. In fact, one of the reasons that Cyberpunk was so hyped was because CD Projekt were the ones making the game.
- The hack seems to have caused massive issues for the company - this hack looks like it has caused the company massive problems: They had to Delay their earnings report The source codes for their games have supposedly been sold. And former employee's info may have been leaked. So uh, yeah this aint good. When i first heard news of the hack, I thought it was no big deal, if I'm being honest, companies get hacked all the time, but this one feels like the hacker got off with a lot more than they normally do.
That is really the bear case, and it is pretty compelling in my opinion. A company that just had a PR disaster, lost their competitive advantage in their goodwill from fans and just had a mega-hack. Seems pretty daunting.
Bull Case
- Cyberpunk was a PR disaster, but not a financial one. In the first month alone, their net Cyberpunk 2077 sales was 10.2 Million That's a good month for any game. and I believe that I read a report saying that there were 13 Million sold by the end of January
- People have a short memory - Remember that game that had the most downvotes of all time? Well it made a comeback it took two years, but EA actually turned the dumpster fire into a fun game that people enjoy (myself included). This could potentially be the case for Cyberpunk as well, especially if management is being honest about its goal to have people believe in them again.
- The hate for Cyberpunk may be overstated - on Steam, Cyberpunk has a 77% positive review rating. Now I understand Steam is PC, but it tells me the game was not as bad as people make it out to be. A game that received this much bad press I would have thought would be closer to a 50% positive review rating.
- They still have not captured many play station sales, so they have potential for upside
- The financials (this is the real bull case)
CD Projekt has an exceptional balance sheet and Income Statement Here is their financial summary, you can dive deeper into their financials as well They have next to no Liabilities as of Q3 2020, and I don't see this changing in the near future. Here is the annual sales revenues and net income for 2015-2019: These numbers are converted to USD at the rate of .26 USD to 1 PLN
| Year | Revenue | Net Income | Profit Margin Ratio |
|---|---|---|---|
| 2015 | 207,483,640 | 89,031,800 | .429 |
| 2016 | 151,814,780 | 65,133,640 | .429 |
| 2017 | 120,427,840 | 52,070,200 | .432 |
| 2018 | 94,354,260 | 28,426,840 | .301 |
| 2019 | 135,530,720 | 45,581,900 | .336 |
| 2020 (9 months) | 121,817,280 | 44,236,140 | .363 |
What I love about this is the company always turns a profit. Now I am going to do a little forecasting and a little math to try to calculate the EPS of $OTGLY for 2020....
We know through 9 months they have a Net income of $44,236,140 if I did my conversions correctly. at 402.62 million shares outstanding, that is $0.11/share before counting Q4. For Q4 I am going to make the following assumptions:
- Profit margin ratio stays the same as the first 3 quarters of 2020.
- CD Projekt had the same amount of average net income for the year when not counting Cyberpunk sales (44,236,140/3 = $14,745,380 of none Cyberpunk sales)
- Cyberpunk 2077 had 10.2 Million Copies sold at an average price of $55.
Taking these into Account, I get $218,388,380 as Net income for Q4 2020. If i add that to the $44,236,140 of net income for the previous 3 quarters I get $262,624,520 as total net income for 2020 - $0.65 EPS. This would put the company at a PE ratio of 21.46 for 2020. I also think they will have a much better Q1 2021 than the first 3 quarters of 2020 and when that gets reported their PE ratio will drop much further if this prices holds.
Now let's look at other companies in the industry and their PE ratios: All these numbers are from Yahoo Finance
- $EA - Current PE ratio is 32.17
- $TTWO - Current PE ratio is 38.61
- $ATVI - Current PE ratio is 32.38
- $UBSFV - Lost money, no PE ratio
- $NTDOY - Current PE ratio of 47.48
Now I don't think $OTGLY should be trading at the same PE ratio as these other organizations because they are smaller and with all the recent hits it makes sense that they could have some issues. I do think that they should be trading at the lower end of this though, maybe between a PE of 28 and 30. I think this presents a good case for $OTGLY; However, there are obvious headwinds. I wanted to also look a little further out and try to see additional long term issues that they may face:
Bear Case (Long Term)
- With how few titles $OTGLY has, they really were relying on knocking this out of the park. They missed. They don't have the amount of games $TTWO, $ATVI, or $EA has to keep their income relatively stable year round. All gaming companies are cyclical, but $OTGLY more than the others. This could create issues.
- It doesn't get any better - this is a gamble currently that Projekt Red will fix Cyberpunk, make it an online game and gain back trust of customers. This is by no means guaranteed, and delaying a bug patch and earnings due to a hack does not help confidence in this.
Bull Case (Long Term):
- Mods - Currently, there are More than 2000 Mods in this game You don't need to look further than Skyrim to see how modding can keep a game alive and keep sales trickling in. While I don't think it is right to compare this to Skyrim in any means, I think modding may be the best thing for the game long term
- Witcher is still a strong brand, and season 2 of the show will be coming to Netflix - This will drive attention back to the witcher series. And this will allow CD Projekt to at the very least have an increase in the Witcher video game sales again, or if they are smart, use the additional views their site will be getting from that to make additional revenue
- A cyberpunk 2077 anime is planned to be released in 2022 - If they can fix the game, make it smooth, and make a lot of good DLC, along with the modding community, it may bring a revival to the game. and if they are really smart it will help them roll out online play.
Overall I think that this is a company that is undervalued, however, I am not sure if the undervaluation will resolve itself soon (markets don't correct themselves very quickly all the time). The Cyberpunk release issues and the Hack have done a lot of damage. With this being said, If you put them at a PE ratio of 30, they would be trading for about $20/share. Showing an almost 50% upside from their current price. That is without factoring in that their Q1 2021 is going to be much better than Q1 2020 and will bump their EPS.
I think that in the short term, a lot will be decided by the upcoming earnings call and what management says to investors. Management really needs to get out in front of investors and be able to calm them and increase confidence in the company. This is why I think the delay hurt them so much. I think that this definitely has upside though and I do have a hard time seeing this stock falling much lower. I currently have 60 shares @ $18.55, but I am going to dump another $1500 in once my money frees up.
Please let me know what your thoughts are - I think there are solid arguments on either side, but to me it just seems like a good value play.
Submitted by Gondar1994 | #Specialdealer Special Offer Online Shopping Store 2016
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