But first they got a bit stuck in terms of profit growth (2015-2020), and then they had a reactionary decline after the outsized success of Uma Musume in Japan (post 2022). I think it can be a good choice again, even if it trades at a crazy-for-Japan 40x TTM PE.

Why?

• New (very successful) releases in the gaming segment, after a period of investment, start to pay off.

• The media & IP segment is no longer a drag, being profitable in 4 of the last 5 quarters (and increasingly so).

So far, only the second reason has shown up in PNL, as the games have been released during Q31. Not all is good, though. The corporate structure has grown a lot, with the number of employees doubling since 2016 and even a relatively small accounting scandal. Let’s go through it.

Why has this sucked in the last few years?

CyberAgent started out focused on online advertising services (basically an agency), a business that it has maintained ever since. Contrary to many other companies in the area, however, they quickly started to diversify through a blog service (Ameba, 2004), starting their investments in media that would culminate starting Abema in 2015 along with TV Asahi. They also have other businesses like crowdfunding (Makuake, started in 2013), a venture capital arm, and even a football2 team in the J1 league3. But what really has shone for them so far is their games division. CyberAgent started in the mobile gaming business really soon, starting Sumzap in 2009 and Cygames in 20114, and it soon became their most important segment.

In 2021, they struck gold. They already had interesting franchises (Shadowverse, Granblue Fantasy), but the Uma Musume craze was on a completely different level. In 2021 revenue for the segment shot up 70%, and operating profit more than tripled. But operating leverage cuts both ways, and a 13% reactionary drop in revenues in the segment, plus some increase in costs, meant the segment profit dropped 37% in 2022, and then 60% in 2023, as costs kept increasing and revenues dropping a bit. In 2023 and 2024, while gaming revenues were well above 2020 in the gaming segment, operating profit was well below.

At the consolidated level, things were not much better. Since the start of Abema in 2015, CyberAgent has been investing heavily there. While losses were reduced between 2020 and 2023, they were still pretty significant. And the group’s most stable business was doing decently in terms of sales, but operating margins had dropped from around 8% in 2020 to around 4.5% in 2023, meaning that profits were slimmer.

What was happening under the hood was a wide investment in games and media that would take a while to pay off. It started to turn in 2024 thanks to a very successful console game release (Granblue Fantasy: Relink) and the growth of the media business, which got close to breaking even. The agency business seemed to also stabilize margins, with even a small increase in margins that seemed to signal that the worst had passed5. But that is nothing compared to what is happening on the games side in 2025. But let’s start talking about the advertisement and media businesses to get them out of the way.

Management

In the coming sections, you will see that I am a bit benevolent in some assumptions and the reason is that I trust that Susumu Fujita is fairly aligned and pretty good. Not only is he the founder of the business and the biggest shareholder (roughly 17%), but I think you will see he has proven that he does not care much about the profits of the period, but about increasing the value of the business over time.

I think that is clearly visible in the steps taken in both gaming and media business. The decision to invest in growth in both cases has depressed profits in a very relevant way, in media since 2016 and in games in 2022-24. In both cases, what we have is a heavy investment with a coherent strategy. In media, having a heavy free user base and being the gateway to betting-related content like sports, which puts them in a fantastic position should sports betting be legalised in Japan. In gaming, expanding the capacity of the group to be able to act both as a contractor and work on their own IPs with different types of games at the same time to increase the value and engagement for each IP.

Overall, I see a good direction for the company, and I don’t see them driven by short-term profit seeking to content shareholders.

Internet advertisement business

CyberAgent’s online advertisement business has handled ever increasing volumes, but has not produced ever-increasing profits. Margins have been declining since the late 2010’s, but volume increases made up for it for a long time, with profits peaking in 2022. Since then, margins declined more sharply, going from around 8.5% to 5%, being even below 5 in 2023.

That is not surprising. The services they offer (inventory buying, optimization of performance marketing, an affiliate marketing network… ) have become heavily commoditized and, while their escale allows them to have some advantages, they also have a fairly big structure to take care off, making them probably less limber.

In the last few quarters the results have been slightly better, coinciding with CyberAgent showing some restraint on hiring in the area6 despite increasing volume. If that is just a temporary efficiency effort or signs of the abiity to handle more volume with less people remains to be seen.

All in all, I don’t expect this business to improve much. I do, however, expect it to continue generating profits. CyberAgent had about $3B in revenue in the segment last year, which means it is fairly large for a company in this business, and I expect the scale to help despite (or probably because) the commoditization. Last year’s operating profit was around JPY 20B7, and this year is going better (about 10% better).

This is also a major risk area, or so it seems of late. See, on March 26th, an investigation into the accounting practices for CyberOwl, a subsidiary dedicated to affiliate marketing, was announced… and a few weeks later (April 16th), the reports came in. The subsidiary had been inflating revenue and receivables, and doing it more and more every year. From a paltry 40 million JPY in 2020, the amount increased every year until it reached 1.75B JPY in 20248, a very relevant amount and almost 10% of the operating profits of the segment.

Obviously that has affected trust in the company, and it declined in value temporarily, and also provides a window into how hard-pressed the business has been, even in the last few quarters have been a bit calmer.

Personally, the fact that the fraud had to become so freaking large to be detected, and only popped up in relation to a potential M&A transaction where CyberOwl would have been the buyer is extremelly worrying. Then again, probably this will make them a lot more cautious in the future.

Media & IP

Or as it should be called, The Blender, because everything goes in there. Blogging, 20 mangakas living together in an apartment, anime production, crowdfunding, a dating app, and even the football team. In any case, and luckily, only a few parts are important and it is easier to explain.

Back in 2016, CyberAgent and TV Asahi9 started a joint venture in streaming, mostly based on an ad-supported model. They have been gaining subscribers and revenue based in conversion to a premium subscription as well, and that is turning profitability as well. From JPY 23B in 2016, the media business grew to 170.8B in 2024, and seems to keep growing (around 12% YoY so far).

This is not only thanks to Abema, but also the result of the ramp-up in content investment in the last few years. Since 2018, CyberAgent has invested heavily into anime, including relatively sucessful IPs like Zombieland Saga or Oshi no ko10, aside from anime based on their properties, like Uma Musume11 and Granblue and in a smaller way, their online blog and webcomics services. But still, the biggest part of it is the increased monetization of the media services.

Margins are still incredibly slim, but growing, and it seems like the company has found significant operating leverage, being able to sustain a increased scale of operations without scaling it in proportion.

This is effectively one of the opportunities here. Abema is not the premier premium streaming platform in Japan, and is very very far from it. It is, in fact, small compared to Netflix and U-Next (about 4.3 million paying subscribers, being the biggest local one). They haven’t published paying subscriber figures for years (since 2020, when they had about 600k), but they have been publishing weekly users, and they oscillate between 20 and 30 million, 2-3 times what they did back in 2020, and sales have increased 4x. Part of it is better monetization of sports events, but well, I think ads and increased premium membership also play a role. A relevant part has also been played by Winticket, their sports betting12 subsidiary, which is promoted heavily in Abema (they have their own channel). It is interesting, but it looks like they are looking forward to sports betting being legalised in Japan as well. And it is normal. Winticket is probably the biggest platform for Keirin betting right now, and they already have the sports rights for many competitions, so they could, in theory, add other sports to the platform easily and promote them as well in Abema. My impression is that it will eventually happen given that… well, there is a lot of betting going on already and the government is not getting anything out of it but I don’t know of any upcoming effort on this regard13.

All this to say that sure, they are not the biggest paid streaming platform, but they can take share by nudging their very wide free user base there, or monetising it via ads or linked services, like sports betting, and they are doing it fairly well. Combined with a decent IP line-up, I think this segment will continue to improve results. It also has the potential to provide interesting IP for the gaming segment or create cross-media hits, like Uma Musume and, to a lesser extent, Shadowverse or Princess Connect.

Games

The games segment of CyberAgent is interesting, partly because it is a bit weird. Before Uma Musume, CyberAgent already had a very decent game business thanks to the Shadowverse, Granblue Fantasy and Princess Connect franchises and also exceptional work on some games made for other companies, like Project Sekai14 or, way before, The Idolmaster Cinderella Girls (so important for the later development of Uma Musume).

Typically, when a company like this hits gold, it starts exploiting the IP like crazy (think Angry Birds or Candy Crush) and usually development for third parties takes a back seat, if it proceeds at all. Not CyberAgent. In fact, they have pretty much dedicated Cygames to their own IPs while Sumzap and Applibot continued developing for third parties. And they have developed for everyone since 2020:

• Bilibili/Toho15 - JJK Phantom Parade (2023)

• SEGA - Project Sekai (2020)

• Square Enix - FFVII - Ever crisis (2023) / NieR Re[in]carnation (2021)

• Bandai Namco - SD Gundam G Eternal (released only a few months ago), Gakuen Idolmaster (released in May 2024, made by Qualiarts)

For SEGA and Bandai Namco, those are some of the best performers they have ever had. And this is only a selection, they have been releasing at least 2-3 games of third party IPs and published by other companies per year, while the roster for their own IP has been similar in terms of amount.

But not in terms of direction. What CyberAgent has done with their IPs under the Cygames brand is interesting, and it is a pity they only own 62% of the subsidiary16, even if they have complete control over it. And what they have been doing is expand their IPs reach.

• For Granblue Fantasy, originally a gacha mobile game, they did 2 PC/Console games (Relink and Versus/ Versus Rising17), one a classical RPG and another a fighting game

• For Uma Musume, aside from content from the main game, they did Party Dash for PC and consoles, mostly a party game that goes well in Switch18

This approach has resulted in a steady stream of revenue (JPY30-40B per quarter) from mobile long-running titles, where the decline in Umamusume and other games has been compensated by revenue from the games done for third parties, although with a much lower margin. That has been accompanied by the occasional non-live-service success (Granblue Fantasy: Relink in Q2 2024).

This year, I think that stream is more or less secure, thanks to the release of SD Gundam G Eternal, which has been very successful in Japan (generating JPY15B in sales according to game-i-daa since release, more than Umamusume and roughly the same as Gakuen Idolmaster, for comparison’s sake). But I think there are better things to come.

Why do I think things are about to change?

Behind the scenes, CyberAgent has continued working on live-service mobile iterations on their main IPs… and they have released two this year. Umamusume has finally gone global with a bang, and Shadowverse: Worlds Beyond is doing well in Japan. Let’s see how well that is.

In Japan, year to date, we see (using game-i-daa estimates) that Shadowverse: Worlds Beyond has generated JPY6B in the last 2 months (since release), and seems to be going decently well still. For comparison, that is almost 3 times as Umamusume’s Japanese version according to the same site in the same period, so it should mean a decent revenue bump.

Now, obviously those are only estimates. But they can tell us that the game is decently successful. But let’s check globally, with Sensor Tower estimates. Umamusume’s global version is estimated to have generated $22 million in the last month in mobile. And then we have Steam. According to Gamalytic’s estimates

• Umamusume’s global version has generated around $30 million in sales since release (less than 2 months), and is still going strong19

• Shadowverse’s Steam version has generated around $13 million, although in this case sales are clearly decreasing20

If we stick to the theory that SD Gundam is enough to get earnings and revenue to its preexisting baseline, compensating the decline of Umamusume JP and other games… well, this is a lot of additional revenue, and with good margins, as both of them are own IP and development. It is difficult to model what will happen, but I will be surprised if we don’t see game operating profits close to JPY20B in Q4 (July-September) with the sales we are seeing now. And that in turn would imply a massive company-wide revision given the current forecast.

Granted, it is difficult to defend the company is trading on this forecast, especially given the profit metrics are likely to be beaten in Q3, given the success of both releases’ initial days and the full quarter for SD Gundam. But I don’t think the full extent of these three releases is being taken into account, even if Cyberagent only owns 62% of Cygames (which develops Umamusume and Shadowverse).

There is an additional factor: Profit margins for Japanese revenue should keep improving. Umamusume, the biggest earner so far, was adapted to alternative payment methods only for part of the last reported quarter… and it seems the policy is to apply it as well to all new releases, so Shadowverse: Worlds Beyond should benefit.

Out of curiosity, DeNA should also benefit from this, as they own a sizable stake in Cygames (around 20% according to the latest annual report).

And the long term?

Both Shadowverse and Umamusume’s global release are mid-term boosts if things work out decently, and they should boost things for at least a couple of years. What will happen later, nobody really knows.

There are more games in the works in which I don’t have a lot of faith (Project Awakening has been delayed so many times already, and there is not much out about GAMM - although if you ask me I think the second will be more important, just based on vibes), but truth be told, the important part is mobile, and they tend to announce games without a lot of advance notice21. For me, the important part is the trend I see of consistently working in highly successful titles, wether they are in their own IP or others… and little by little expanding internationally.

They still have two of their main IPs (Granblue, Princess Connect) pending some revitalization work on mobile, aside from whatever new that they can release.

Summary

CyberAgent has a formerly unprofitable business turning around in media22 and new releases going better than expected in the mobile side. Both businesses have significant operating leverage, and I don’t think the price takes into account how big the effect of the new game releases is.

So… I am long CyberAgent now, let’s see how that goes. Let me know what you think!

Other news

Haven’t made a half-year post to discuss performance or picks, so let’s talk about a few things

• I sold Creepy Jar a bit back, in May, at around 430. That’s a decent sell, almost 50% up from the price when I first discussed it. It has then continued to climb. Personally, I wouldn’t hold until release, but hey, presales are doing well.

• I do currently hold a position in TV Asahi, started in late May, as I mentioned in April I would likely do if there were no further news (basically just wanted to make sure the market would take the extra liquidity before buying)

• I do have positions in both Anycolor and Cover in the vtubing space, in case the discussion here was not clear. Both have been doing well, but I have to say I am amazed at the numbers Nijisanji (Anycolor) is doing in English after their prior problems. That, and that VShojo blowing up, should make things easier for both of them.

• A few weeks after opening the tracker position in Mandarake, I mentioned here, I sold it after metrics deteriorated again at a small loss. Haven’t looked at the company since, because it seems likely that I will end up doing something dumb again.

• Not a change, but I think tinyBuild is even more interesting nowadays after the release of The King is Watching. It is not a huge game, but it should help a bit with the cash flows until the release of Kingmakers in September. In my view, that relative success (minor one, has to be said) reduces the likelihood of an equity raise before the big release. Doesn’t eliminate it, of course, and it is still a high-risk position.

As you can see, my publication rhythm is slow right now, and I expect it to still be so for a while. Hopefully it can pick up in a few months, but right now, not a lot of time free to dedicate to this! But in any case, I am still open to discuss stocks in this area. If you have any interesting situation you want to discuss, don’t be shy and drop a message!

Revenue improved 10.5%, operating profit 15.8% and net profit attributable to shareholders a whopping 59.5%. Still, I expected a bit more in the operational front, with operating profit closer to 200 million than this. The difference largely comes from less profitability in Q4 than I expected as about 35% of the costs of the year have been booked in the last Q, making profitability comparable to that of last year’s Q4 (where the costs of House Flipper 2 were booked) instead of improving on it. While product amortization expenses were indeed far lower than in other quarters as expected, other costs (included some write-offs) concentrated in this quarter, and non-capitalised development services were also accounted for in a larger share than I expected.

Still, full results, even if the sale of Big Cheese is excluded, are excellent, with no major write-downs and relevant income coming from interests on deposits and loans (51% of total financial income). Cash conversion was, as usual, good, with about 160 million PLN in FCF2, and despite the massive dividend paid (effectively 160 million PLN as well) the balance sheet is stronger than ever, with 266 million PLN in cash and deposits and 56 in receivables3, and not many liabilities (60.8 million PLN in total), which leaves us with about 10% of the market cap in current assets. Inventory for PlayWay means completed videogames and work in progress there, that’s why the 103.6 million in inventory should not be taken into account. It is, by the way, a record amount, corresponding mostly to games still in progress (94.8 million PLN).

That is one of the first interesting insights that we can get from this report. PlayWay has not stopped investing, but as was hinted by the reduction in the number of subsidiaries and moves like the sale of Big Cheese and others, they are in a stage of digesting the growth of prior years and focusing in the simulation segment, where they have gotten their biggest successes.

That said, PlayWay’s questions have always been on the future, rather than the present, and that is why it trades at about 12 times profits and with a 7% dividend yield. With that in mind, let’s review the strength of their main IPs, the latest set of releases and their line-up

Main IPs

PlayWay and IP seem antonyms at first sight, but that is a bit of an illusion. While PlayWay’s model is based on throwing a lot of stuff at the wall and see what sticks, from time to time something sticks, and that is a large part of PlayWay’s profits.

The criteria I have used to include a game or franchise here is generating more than 10 million PLN in a single year since the detailed disclosures started in 20224, and these numbers include DLCs and second parts, in case they exist. A few interesting things:

• The demise of Cooking Simulator, a game published in 2019 and that generated relevant revenues thanks to DLCs. However, from 2021 onward, Big Cheese seems to have impoloded, resulting in almost 3 years without new versions or DLCs (from late 2021 until mid 2024) and having the sequel, announced in 2023, still without a release date. These problems ended up causing the sale of PlayWay’s stake in Big Cheese, although they seem to retain publishing rights for the original game.

• House Flipper’s continued strength thanks to the release, in late 2023, of House Flipper 2. While not as successful as the original, community-wise, the Co-op mode being released in a few days could revitalise it.

• CMS starts to show its age, and especially the slower pace of DLC release (3 in 2024 vs 6 in 2023 and 2022). The new entry in the series (the fourth one) is already in the works, but there is not much information out yet. I initially hoped for it to be released in 2025, given the slower pace of DLCs that seemed to indicate attention switching to the new edition, not so sure anymore!

• PlayWay seems capable of generating new additions as evidenced by Contraband Police (2023) and Crime Scene Cleaner (2024). Infection Free Zone (2024) was also a candidate, but is not shown in the list, as it was published by Games Operators and not directly by PlayWay. Regardless, it has seen less consistent sales than either Contraband Police or Crime Scene Cleaner.

Overall, the main franchises generated revenue higher than in 2022 or 2023, thanks to CSC and Contraband Police picking up the slack. The reason I consider those worthy of being main titles despite the lack of sequels is that their sales continue to be strong (Crime Scene Cleaner has sold more than 200k units in 2025 already thanks to content updates and CP more than 100k, and there is a DLC incoming later in the year). But the most interesting thing is not even in there.

PlayWay’s scattershot approach has also meant that the proportion of revenue generated by the big names is smaller this year, an interesting outcome in a right-tail business such as this. Thanks to their low cost, their experiments do, as a basket, pay for themselves and then some, which explains their industry-leading 59% operating margins.

Mobile has been an increasingly important part of this revenue, and seems to continue going up. Mobile-related revenue (as measured by major customers disclosures) has more than doubled in 2024 to 16 million PLN. Still a tiny part of the business, and one at which PlayWay arguably arrived late, but they are growing well at a challenging time for the industry through the release of fast followers, as I mentioned in the last article on the company.

2025 releases so far: between flops and irrelevance

PlayWay’s line-up for early 2025 was never expected to be very successful, and it has sadly failed to surprise to the upside so far. Builders of Egypt failed after its tortuous history of development, resulting in the closure of the studio5, as did Viking Frontiers. None of the other releases was big enough to be relevant, although a few of them (Used Cars Simulator, Car Mechanic Shop Simulator, Chocolate Factory Simulator6) are likely to have been profitable. Some interesting DLCs (Simrail, Gunsmith Simulator, Ship Graveyard Simulator, CMS217) have also been released, but I don’t think it was enough to compensate for the lack of successful new releases.

Pending a couple of releases, Q1 seems like it is going to be slower in terms of sales than last year, and Q2 looks that way so far, at least in terms of revenue and pending some releases (Survival Machine and the CoOp DLC update for House Flipper 2). I expect profitability to be mediocre for PlayWay as well, as some games (Builders of Egypt, Haunted House Renovator) had relatively relevant budgets8.

The line-up

There are some interesting releases coming right up, as mentioned. Survival Machine (today!) is the one that looks better so far. Wrap House Simulator (no date but scheduled for May, potential delay) is a bit of a dark horse, with the demo having surprisingly good peaks and reviews, but translating into less following and wishlists of the main game than I would like. But the big one is the House Flipper 2 Co-op, coming up on the 15th of May. If it manages to revitalise the House Flipper community, this can make not only the quarter, but the year for PlayWay. House Flipper 1, 2, and DLCs amounted to 25% of total games sold last year after barely slowing down from 40 in H1 to 37 million PLN in H2, so keeping it fresh is vital for the company. Conversely, a failure there would be really bad for the company, at least in the short term.

Beyond the immediate releases, the most interesting things remaining but without confirmed release dates (although most are aiming for 2025 officially) are the same as discussed previously: 30 days on ship, Holstin (both in Steam’s top 100 wishlists, although toward the end of it), and Honeycomb9. The star is, however, the new iteration of CMS, and I don’t know when it will be released.

Additionally, there are very interesting upcoming DLCs. Aside from future content for House Flipper and CMS21 (as of yet unannounced, but I have no doubt it is incoming10), there is new content upcoming for Gunsmith Simulator, Thief Simulator 2 and, in Q4, Contraband Police11.

Conclusion

As always, backward looking results are not really what is more interesting here, as good as they might be. PlayWay trades cheaply because it is really hard for people to get behind a videogame company without premium IP these days. But it seems like the shotgun approach keeps delivering results, as long as costs are kept in check.

Personally, seeing what is pending I think PlayWay is still well positioned, with 3 really strong titles in the line up (new CMS, 30 days, Holstin) and an upcoming slate of content for their key titles that looks fairly attractive.

More importantly, I think that the future of games is a bit of a barbell, with very disciplined low-cost, low-price operators on one end and the GTA VIs and Baldur’s Gate 3’s of the world in the other12, and I haven’t seen any operator more disciplined an committed to the low-cost approach than PlayWay, combined with a preference for returning money to shareholders rather than empire-building, so a 13.5x13 multiple on 2024’s EBIT, that I think is likely to improve in the near future even if H1 2025 is soft, still looks cheap to me, especially coupled with a strong balance sheet.

As always, please do your own research. And if you want to leave your opinion in the comments, hey, that’s what they are for!

Miscelanea

• IG Port also presented results! Better than expected, but according to management that is only a timing issue (with their Q4 expected to be weaker). While their revenues are up 32% and their operating profit 47%, their net income is still down 11%, as the difference in tax rates I mentioned last time is still affecting them (aside from some other operating income last year related to investments). They have also announced a lot of new series, aside from continuations of their strong portfolio (Spy x Family, Kaiju n. 8, and the upcoming One Piece remake):

  • A Star Wars series (and two shorts) for Disney+

  • An adaptation of Agents of the Four Seasons, where they are taking a big part in the production committee.

  • A new Haikyuu!! movie

  • A new series for Netflix with Sanrio characters

  • And more, too much stuff to list!

• I’m back being a shareholder of both Cover and now also of Anycolor, as outlined last time. Cover’s hit on Gura leaving was smaller than expected, so you probably did better than me if you didn’t trade around!

• Who said a shadowdrop can’t work? While it hasn’t quite ruined Clair Obscur: Expedition 33’s debut, TESIV: Oblivion Remastered has been one of the most successful releases of the year so far, with more than 2 million copies sold in Steam alone, according to estimations. Given that it is available on Game Pass and on PlayStation as well, that impact is very likely to be underestimated. It currently ranks second in Gamalytics estimated revenue for this year’s releases, only behind Monster Hunter Wilds (although practically tied with KC:D2, R.E.P.O., and Schedule I). The impressive part is that there was no marketing campaign14, and the announcement and release were simultaneous. With rare exceptions, timelines from announcement to release have been shrinking, and I see more and more reliance on shock and awe over letting fans marinate with drops of information from time to time, as used to be the case. It might be a reflection of our shorter collective attention span, of the saturation of the market (more difficult to keep the attention of your potential customers for a year with 10 good releases for the same public going on in between), or any other thing. My impression is that, except for rare exceptions, revenue generation also happens in an increasingly smaller timeframe, with rare exceptions15.

Assets: Cash, land, cross-holdings, and affiliates

TV Asahi is one of those companies that publishes all1 its reports in English as well, which means we can read their balance sheet!

They have a book value (446B yen, excluding non-controlling interests) well above their current market cap (268B yen). But not all the assets are liquid, and we would be wise to exercise some caution.

In my view, we can take cash, receivables,2 and marketable securities (mostly short-term fixed income) at face value. Let’s forget about inventories and other current assets for now. With that alone, we get 155B, which leaves us with 58B once we subtract all liabilities.

Let’s move on to the fixed assets. The tangible assets are, for the most part, offices and studios, with the “other tangible assets“ epigraph referring to equipment and works done in those buildings and land to the value of the land as such. The majority of the buildings are in central Tokyo, with over half the total value in Minato Ward. Taken together, the average price is about 2 million yen per sqm, which is well below average prices for land3 in that area. So let’s take the land at the value in the balance sheet and forget about the buildings themselves, equipment, and so on. That would be another 64B.

But the interesting part is actually in investments, which include:

• 10B yen in bonds held to maturity, not much to talk about here!

• A good chunk of value is in quoted stocks. That was 68.5B yen in March 20244, but let’s review the main holdings (overall, there is a slight increase, but they have also sold about 4B in securities in Q4 and not revealed which ones, to my knowledge, so I think we can use 70B as an approximation):

  • 4.6 million shares of Recruit Holdings (6098.T): 34B at today’s price, 30.9 in March.

  • 10.2 million shares of KDDI Corporation (9433.T): 26B at today’s price, 23 back in March

  • 3.4 million shares of 2433.T (3.6B now, 4.8 before)

  • 0.8 million shares of 4234.T (2.4B now, 3.4 before)

  • 3.9 million shares of 9405.T (2.7B now, 2.5 before)

  • 1.1 million shares of 9412.T (1.2B now, 1.2 before)

• Their holdings in Kotobukiya - 7809.T are not included in those (about 1.8B at the current valuation)

• And then there are the companies that they consolidate through the equity method. There are 17 of those, mostly several local TV stations that are not publicly listed5. But there are 3 areas that are of interest:

  • 20% of Toei Animation and 19.6% of Toei Company. Since they are treated as equity-method affiliates, the stakes are not valued at market value. The value of those stakes is 142B yen for Toei Animation and 64B yen for Toei Company, for a total of 206B yen6.

  • AbemaTV (37%) & AbemaNews (50%), both part of the Abema service jointly established with CyberAgent. Abema is an online streaming platform with a mixed ad-driven and subscription model that has been inching toward profitability thanks to growth. You can read more about them on CyberAgent’s material.

  • Telasa (50%), a typical SVOD established jointly with KDDI which is having trouble achieving scale7. If it was not being fed content by Asahi (which needs it anyway for the TV), it probably would have folded already.

• Participations in unlisted companies for almost 60B yen in the balance sheet (including, if I understand correctly, the unquoted affiliates mentioned above).

Of all this, I think Abema and Telasa are interesting to take into account to discuss the business, but not as assets. And the participations in unlisted companies is probably worth something, but who knows how much. But I think we can consider their roughly 278B yen in stock holdings as an asset for our calculation of the value TV Asahi holds, as well as the 10B in bonds8.

That would leave us with 410B yen after paying down all liabilities, and that is only counting relatively easily liquidated stuff. TV Asahi trades for 268B yen. Are they burning money in their day-to-day business?

The intangibles

You won’t find it in the report, but TV Asahi also has interesting rights, especially in terms of Anime. While unfamiliar for most American audiences9, pretty much everyone else would have heard about Doraemon, with Asahi being one of the main rights holders, and Shin-chan (ditto). Asahi not only acts as the main distributor, but also owns the anime studio that made both animations10 and is one of the main producers. They have also acted as producers in other anime (like Sailor Moon) and have participated in more recent productions, with Blue Lock being the most successful one.

Both Doraemon and Shin-chan have been successful for decades, and TV Asahi makes almost annual films for both11, aside from regular TV episodes (both have ongoing series), and are the most valuable properties in this sense.

TV Asahi: The business

Surprisingly enough for that market cap, TV Asahi is doing just fine, although it is a declining business in many aspects, as is all linear TV. Their operating income in the last few years has generally trended down, although the best year was FY202212 (with a post-COVID recovery in many areas, and cost-cutting measures from ‘21 still in place), and 2025 seems poised to be a relatively good year, with all segments growing, and will probably beat 2023.

And what are those segments?:

• TV broadcast, including most licensed content broadcast. Includes ads in open channels13, their paid channel business, sales of content and other streams of income (like royalties and the like, where the income from merchandise from anime would fall, for example). Of all those streams, only “other“ is growing; the rest are either flat or going down (especially ads, the biggest source of revenue). It is the bulk of both the revenue and the expense. Despite revenue declining, they have managed to keep it profitable every year (even in 2021, when there was a sharp YoY decline. It has recovered slightly post-COVID, but below 2020 levels, and it is unlikely to ever reach them again.

  

• Internet business: Sales of content over the internet, and royalties for streaming of original Asahi programming. It doesn’t include, however, Telasa and Abema revenue, as they are equity method affiliates. It does include what they pay for TV Asahi content, though. Asahi also has its own online distribution (Douga). It has grown relatively well, but there is no COVID explosion here. While it is growing well, it has not compensated for the drop in TV so far.

  

• Shopping: TV Asahi has a thriving teleshopping business, which seems directly mostly directed at the older audience. Not great margins (surprisingly low in 2023/24, close to 10% before that), but growing in relevance, but very small compared to TV, and seems to have stalled post-COVID

  

• Other business: Music publishing, events, equipment lease, DVDs and Films (mainly Doraemon and Crayon Shin-chan). Music has recovered to pre-COVID levels after a drop, and events keep growing. DVDs have better and worse years, but streaming has largely killed the business, equipment lease is somewhat stable, and films are a hit-driven business14. All that together adds up to 73% of other businesses as of 2024. I have no idea what makes up the rest!

In general, and without considering income from affiliates and dividends, they have been generating a decent operating income, with the worst year (2024) amounting to 12.3 billion in operating revenue (or roughly 9B net to shareholders after tax). 2025 seems like it is going to be the best year since 2021, with operating income 41% ahead of 2024 in the first 9 months of the fiscal year.

As you can see, it is not a great business, but it does generate cash. And that is the cash they have been using to reward shareholders. Not even all of it, actually.

Capital allocation

TV Asahi has been paying about 5B yen a year in dividends, and they have made the occasional repurchase as well (2B in 16, 3B in 21, 2B announced last week). That said, they have been investing very heavily in the last couple of years, so you won’t see free cash flow there. But it is an investment, and one that I think will pan out.

They have also been selling part of their cross-shareholdings in the last few years, and used that along with the funds generated by the company to invest in more real estate and shareholder returns

That said, that percentage of net assets shown is… well, a bit tricky, because it does not take into account the shares in Toei Animation and Toei Company as strategic shareholdings. But they have stated as an objective keeping it below 20% of net assets.

They seem to be happy to go lower, though, and this year they are selling a record amount of about 8B, according to one of their releases. Only part of it happened through December (5B), so more sales are expected in Q1.

All this to say that I think they will work to reduce the cross-shareholdings, but very, very slowly, and without including the Toei stakes in the short term.

Investments

Have you ever thought it strange that most capital allocation sections focus mostly on shareholder returns, and not in investing in the business? I typically do that because most of the businesses I talk about are relatively capital-light, accounting-wise (meaning a good chunk of their expenses are in potential growth), and even then, I have complained on occasion15. But in this case, there is something tangible to talk about.

Events

Enter Tokyo Dream Park

Essentially, this is a huge building with several spaces, a concert hall, areas for events, theaters… essentially, TV Asahi is looking to capitalise on the trend for increased event spending, and they want to both organise their own and have a huge center were others want to hold live events.

The location is relatively close to the 20-meter-high Unicorn Gundam and Diver City16, and TV Asahi has invested a lot of money on it. I haven’t seen it detailed anywhere, but I suspect it is going to be close to 50b yen17, the total amount earmarked for strategic investments in the last management plan18, although they have gotten stakes in Kotobukiya and BookLive as additional investments. Some spaces are already open for reservations, and part of it will be opened in the coming months, with a full opening in 2026. This should propel event revenue going forward, and TV Asahi can populate a good chunk of the event calendar (profitably) if they don’t have enough external demand, given that they have both a good range of IP and a music label.

Anime

TV Asahi was a very relevant investor in anime properties in the early days, and aside from Crayon Shin-chan and Doraemon, they acted as producers for Sailor Moon, Slam Dunk, and some of the Gundam series. But they failed to get their hands on much of note from the early 00s onwards19, other than exploits of their existing IP.

In the last decade, they have had some hits, like Yuri!!! on Ice and Blue Lock20, and have ramped up both in number and apparent quality (they have just announced a joint project with Science SARU21, of Dan da dan fame). Aside from that, they have entered into an alliance with both BookLive and Kotobukiya22. BookLive is an online bookstore that doubles as an online manga publisher23, and Kotobukiya is an anime figures company. The idea is to leverage TV Asahi’s distribution to strengthen the IP of BookLive and Kotobukiya24, and at the same time use Kotobukiya’s expertise to profit more from the merchandise.

Overall, although it is not first-rate, I think their already existing IP and a solid distribution base, as they already have (with Abema and Telasa doing the streaming part).

Why would this re-rate?

So far, we have seen that TV Asahi has a decent, but not great, business and a huge collection of assets that more than justify its current price. So, when will this re-rate, if it does at all? Well, there are several options:

• Buybacks and dividends: As I have mentioned, Asahi has been selling small parts of its holdings, and used the resulting cash both for investments and returns. They haven’t typically held huge amounts of cash, and they have chosen stock investments well, historically. One potential catalyst is the acceleration of the sale of cross-shareholdings and using those funds for shareholder returns. I don’t think it is likely to happen fast, but they have been reducing the number of shares outstanding in general, and pricing is fairly attractive now, both to sell some of their holdings and to buy back shares.

• Results improvement: Several avenues for that:

  • The streaming platforms are improving their results, and they have been masking for years the share of earnings in affiliates that TV Asahi really has. All those TVs are profitable, but billions in losses from ABEMA and Telasa have been pulling down the total. ABEMA has been improving markedly and is close to profitability, which would improve how the results look (and the value of their stake, of course).

  • Event revenue and profits increasing markedly thanks to Tokyo Dream Park.

  • The investments in anime in the last few years seem to be having some effect, even if they are in a relatively early stage.

None of them are a sure thing, and you have to weigh it against the possibility of years of losses in the TV Broadcasting business if they don’t cut costs as the business slows down. But I think it is unlikely, given their history. If they were going to keep their level of expenses at the level of their past, we would already be seeing relevant losses, but they have been adjusting little by little, and I expect them to continue doing so.

Last but not least, there is a bit of an overhang at the moment. Two of the main shareholders announced they were going to sell up to 9 million shares of the company, roughly 9% of the company’s shares25, and the transaction will take place this week. To offset that, TV Asahi has approved a 3B yen repurchase starting in May, which can absorb, at current prices, a bit more than 1.1 million shares… which means there is going to be a lot more availability of shares than it used to. A similar situation happened with Toei Animation last year, when Bandai Namco sold its stake, and shares were tumbling for a couple of months before finding a new equilibrium. The same might happen here, which is why I don’t own shares yet!

Conclusion

TV Asahi is asset-rich and has a decent business on top of it, with several avenues for improvement in the next few years. It is not a guaranteed slam-dunk, but I think it can have a good place in a basket of cheap companies, even if it is only as a way to own Toei at a discount. While currently there is some overhang that might cause the price to tumble in the short run, I will probably open a position in the near future, if I see the price accepting the new supply.

As always, do your own research, and please let me know the results!

If you are wondering what that is, it is Hololive's biggest star leaving the company. Now, the monetary impact will probably be a lot less than that implies, as Gura's activity has been intermittent since 2022 and, while popular, she had a very broad but less engaged fanbase than the likes of Marine, Mori, Kobu, or Pekora due to her subdued activity. Still, really important in terms of vibes.

But I will get back in, I just think it might drop further (drops on prior minor announcements were sharper), and you might not want to trade around it as I am doing. Let's see why I still think this is investable and with what caveats. The heavy investment in Cover Corp was based on three points:

• Strength of the V-tuber industry

• Better treatment of talent vs Anycolor (and hence longer time in the company and better presence outside Japan)

• Price

Now, the price is higher than it was back when I first published (roughly 40%, although my average price was a bit higher than that), but not incredibly so, and the multiple (27x PE after the drop tonight) is not huge for a company growing both top and bottom line at more than 40%. So price, while less compelling, is still adequate.

Let's go over the other two points.

Strenght of the v-tuber industry

Look, the v-tuber industry looks much better than last year. Don't take my word for it, look at v-stats numbers for the last three months (in order, January, February, March):

January presented a mild increase in viewing time in YouTube for the tracked v-tubers (17%, although Cover grew only 5%) but Februray (+39.6%/+79.3% for Cover) and March (+49.8%/+52.7% for Cover) were just impressive. Anycolor also grew very significantly, and so did almost everyone else involved (althoguh Brave is still a distant third).

In terms of revenue and profit, the last sets of results reported by both Anycolor and Cover were good for the accumulated 3 quarters of the fiscal year and fantastic for the last quarter.

• Anycolor is making +24.2% on revenue and +20.9% on profit cumulatively and +48.5%/+63.8% in the last quarter

• Cover Corp is making +50.1% on revenue and +43.9% on profit cumulatively and +69.2%/+71.2% in the last quarter. And they finally started to use the merchandise lever.

Granted, Cover has worse cash conversion due to heavy investments in content and working capital this year, but both are generating cash without trouble. So the sector is doing well.

There might be some problems with the US tariffs for Cover, as they sell more in the US (roughly 28% of sales for all verticals) and they manufacture part of their merchandise in China, and that could impact profitability until they adjust. But still, an acceptable risk, as this would only affect merchandise, one of the verticals.

Talent in Cover vs. Anycolor

That was the main reason to choose Cover vs Anycolor in the initial analysis, and we also revisited the potential problems in this piece from December, in previous Cover graduation announcements

My conclusion then was that departures at Cover were still not that worrying. After three more departures in 4 months (Mumei, Shion, and Gura), I am a bit less convinced.

Now, all of them have known health issues (physical and mental) that have caused them to have hiatuses, and all have been in the spotlight for a while (Shion for 7 years, Gura for 5, Mumei for 4), so without the prior leavers, I might not be that worried. But the fact that all three have cited disagreements with management as part of the reasons for leaving is worrying, especially in Gura's case, taking into account she had a lot of leeway for taking hiatuses, streaming less, and so on (in fact, she has been on and off since 2022). Now, they are still far from Anycolor's numbers and level of vitriol, but it implies the advantage Cover had has deteriorated markedly.

There is also another phenomenon that I think is relevant. In March, we saw a huge comeback for Nijisanji EN (the branch Anycolor basically destroyed last year) through new talent debuts and intensive streaming and promotion.

And it seems they are beeing able to carry a big part of that momentum through April (provisional numbers as of April 10, with a 200% increase over last year). Interesting to note that April is still seeing healthy increases across the board for everyone involved.

Yes, their average viewership is lightyears away from Hololive (Cover), but that is true also in Japan, and Anycolor is extremely profitable there regardless.

So what I am seeing here is two things:

• Cover's advantage on retaining talent has deteriorated

• Retaining talent and focusing on the talents you have is important (average numbers and growth from Cover looks great because of that)… but less important than it seemed, as Anycolor seems to be able to reset their branch (pending confirmation over time). That means Anycolor's extreme focus on efficiency is less risky

Conclusion

My conclusion when looking at everything is that the industry is still more than fine, growing well in both viewership and monetization… but that Cover, while still the best asset in the industry, has less of a premium over Anycolor.

What I am going to do with this (once I think Cover's price has settled down, but hey, I am trading around, you might prefer to remain invested if you already are) is invest in both. Still have to think through the percentages, and will probably depend on where the prices land (as Anycolor is also dropping in sympathy). But for me, this has switched from trying to invest only in the asset with the most quality to investing in the sector trend, and as long as Anycolor's multiple is a bit less demanding than Cover's, as is the case today, I think it makes sense to have both.

As always, not a recommendation, and please do your own research. And if you reach different conclusions, we'll all be wiser if you share them!

That made many parental advocacy groups very angry1 and was widely regarded as a bad move. It made some people very rich though.

I have been watching Japanese animation since I was little, and chances are you have as well2. I was born in 1990, but it doesn't matter if you are a bit older or younger. Anime already had a big international run in the 80s, thanks to Mazinger Z, Heidi, Lupin III, and Captain Tsubasa3 among others. For the TV stations and networks, it was cheap content and made for good numbers in kids’ slots. But economically that took a while to start really affecting the Japanese companies, which were really focused on their home market.

Part of the reason is that the English-speaking world didn't join the trend until the 90s, with Akira4, Dragon Ball, or Ghost in the Shell. Sure, there were some popular Japanese animations before5 but nothing on the scale the later fandom would have. And that scale has done nothing but grow in the last decades, especially in the last one, as this graph by (of fame) illustrates

You can find the original article here, and it is a treat.

Animenomics

Anime market outside Japan up 18% in 2023

This is your weekly Animenomics briefing, covering the business of anime and manga. Today is Wednesday, November 13, 2024…

Read more

a year ago · 14 likes · Richardson Handjaja

That said, I think that graph understates the situation. A lot. First, because it includes only the animation industry itself, and I think adjacent companies are relevant, and second because it only takes into consideration Japanese companies, and the industry is more and more intertwined internationally. Solo Leveling is one of the most successful animes in the last few years. Tower of God was less successful, but also in a relatively high tier. While both were animated by Japanese studios, the source material is Korean. And no one will be able to convince me that the HoYoverse is not anime-adjacent.

But what does anime-adjacent even mean? How is this industry organized? Well, that is what I want to talk about. So grab your towel, and follow along!

But wait, is the industry interesting?

I am sure it won't have escaped your attention that the growth is not that high in the numbers provided in the above graph, that come from the Association of Japanese Animations (AJA). Doubling your market since 2014, give or take, and after a period of stalling, is not such a huge deal, even if it is understated there.

The growth in the industry comes from different sources, and the AJA breaks down the different segments. Let's see how they have fared in terms of growth (CAGR since 2014 and absolute numbers):

1. Streaming: 18.6%. From ¥59.5 billion to ¥250.1 billion

2. Overseas market: 20.3%. From ¥326.6 billion to ¥1722.2 billion

   • It is important to take into account that all overseas sources of revenue are lumped together, and this is revenue gathered by Japanese companies only.

3. Live entertainment: 14.8%. From ¥28.6 billion to ¥108.1 billion

4. Merchandise: 9.4%. From ¥312.3 billion to ¥700.8 billion

5. Gaming/Entertainment: 9.7%. From ¥144.3 billion to ¥337 billion

6. TV: -2.9%. From ¥128.3 billion to ¥97.3 billion

   • TV seems to have peaked in the early 2000s and has been declining since, although not in a linear way. It takes into account only domestic distribution. I suspect international TV distribution revenue has increased, as the deals before were… well, very low.

7. Movies/Film: 10.5%. From ¥27 billion (2014) to ¥68.1 billion (2023)

8. Video/DVD: -12.8%. From ¥98.2 billion (2014) to ¥36.2 billion (2023)

   • The Internet killed this one almost completely, except for collectors.

9. Music: -3.5%. From ¥36.7 billion (2014) to ¥26.7 billion (2023)

   • This captures mostly physical format sales. Part of it is now under streaming (all YouTube or similar sites, for example). Given the increase in Live entertainment, which includes live music performances -arguably the main events- I would say anime-related music is alive and well.

Let's look at domestic revenue first, and how the categories are growing.

Streaming is still not as mature a business in Japan as it is in the US, and that shows in the growth in the last few years (it was 51% in 2023 and has done 2.5x since 2020, not that I expect that to continue at that pace), and in particular anime was not the most monetized area there. It will reach a ceiling soon, probably, but it is already ahead of TV. Live events are a bit of a surprise to me. I knew they were growing, but not to that extent (domestically, a lot to do there internationally). Gaming/Entertainment includes many types of licensing, from videogames to Pachinko6, and given the decline in Pachinko, it is interesting that it keeps the pace domestically and Merchandising growing at the domestic level at that pace is encouraging, mostly because it has not declined post-covid, as many other markets have (hi videogames!).

But why is it growing so fast internationally7 and is it likely to continue? Well, I think so. Partly it is because of the increasing popularity of the genre, and I think that is continuing and will continue for a while. For example, Crunchyroll (an anime-focused streaming service that works mostly outside of Japan and belongs to Sony) announced it had passed 15 million paying subscribers in August, up from 13 in January. But that is, in my view, not the whole story.

‘80s and ‘90s kids who grew up with anime are now parents, and what used to be those weird Japanese cartoons that cause epileptic attacks and are too violent is part of their childhood. That makes taking share of wallet easier, and so far there has been no reaction against it from the new generations (maybe because while the cartoons were mainstream, being a fan of the genre wasn't, so they are not growing up seeing rooms full of old cartoon's merch - or maybe, like Nintendo, anime is universal enough in its variance that it won't cause that reaction, we'll see). Much like other fringe hobbies in those days (D&D, Warhammer), anime has the double trend of increased spending for kids from parents who don't regard it as quite as horrible and adults spending what they couldn't when they were young. I think that is a trend that still has some legs.

The different roles in the anime industry

If you look for public companies involved in anime you are only going to find a handful. Toei, IG Port, Nippon TV, and Kadokawa (mostly because of owning IPs, although they have studios as well), and maybe some lists will include Bandai Namco and Sony as well, although it is a small segment for both of them when measured directly (although they are relevant players in the ecosystem!). And I think that is wrong. The reason you would usually get such a short list is that people will default to thinking about who makes the anime itself, but that is not the only, or indeed the most profitable, function in this sector. In my view, we have 6 different actors, two of them being a bit debatable.

• Anime studios: Never invest in a pure anime studio that just takes work for hire from production committees and does not have the money to be part of them. The competition is fierce, the money is tight and the barriers to entry are non-existent, as there is an endless supply of animators and would-be animators. Even Gainax (Evangelion, FLCL…) closed last year8. Investing in studios only makes sense when they are so well-established that they have the money to participate as producers and participate in the income stream from licensing and distribution. The role of the animation studios in the ecosystem is basically being paid (sometimes below cost) by the production committee to do the animation. If they have the resources, they sometimes are part of the committee themselves, but that is a relative rarity among small studios.

• IP Owners: While there are relatively successful anime originals (Cowboy Bebop, Psycho-Pass…), it is far more common that anime is a derivative work from manga or light novels and, increasingly, from webtoons9, while series made directly to promote toys are, I think, a bit less common than they used to be10. That simplifies the process (in theory11) and brings an already existing fanbase. This role is typically filled by manga publishers, and they are usually in the production committee, on top of getting paid for the use of the IP itself (usually as a royalty, but deals may vary).

• National anime distributors: Or as they are also known, Japanese TV companies. Streaming services also play more of a role of late nationally, with U-Netx, Docomo, and Abema all being primary distributors for some animes domestically. But for the most part, the TVs are either the primary distributor or participants, even if the streaming partner is a relevant one. Historically, that also meant they were a very relevant part of the production committee and that has led to some, like Nippon TV, entering into the business with both feet through M&A.

• International anime distributors: Relevant for the ecosystem, not so much in terms of investing. International distribution is mediated thorugh large streaming platforms (mainly Netflix and Crunchyroll) or especialised distributors (GKIDS, pending Toho’s acquisition). Sony has significant rights, and has rolled-up some of the formerly relevant players into Crunchyroll (Funimantion and Manga entertainment come to mind). Of late, they have started to be producers as well, with some animes being created for these platforms.

• Licensors: Companies using the IP for derivative products. They come in two flavors

  • Merchandising licensors (collectibles, figures, t-shirts… the works). The Bandai part of Bandai Namco is probably the biggest in the sector and juices the Dragon Ball and One Piece licenses to death. But far from the only one.

  • Additional content licensors: Videogames and adaptations into other media. Typically they license from the anime version rather than from the original IP holders12

• Production committees: The actual owners of the anime. It is typically a group of companies, that usually includes the IP owner, sometimes the studio making it and usually at least one distribution partner, national or international. Some licensors can get involved as well (Bandai Namco does this from time to time). They pay the studios to make the anime, and are the ones that receive revenues from both distribution and licensors. One of the debatable actors, as they are joint ventures.

• Companies making anime-adjacent products: Sure, that is not anime directly, and that is why I think it is debatable as well. But Nihon Falcom's revenue increase in the West follows a similar curve to that of anime, and there is no denying Sanrio is profiting handsomely from the expansion of kawai aesthetics. It is also no coincidence that v-tubers lean heavily on these aesthetics and tropes, and without anime (and K-pop) expanding the idol culture and tropes, it is doubtful they would have been able to expand outside Japan. Some Chinese and Korean gaming companies probably also fit in here, to the extent they use similar aesthetics and have been able to capitalize on prior work done by Japanese media. This includes:

  • Some Japanese videogame makers like Square Enix, CyberAgent (CyGames), or Nihon Falcom

  • Other related game makers in other countries (miHoYo, midgar studios)

  • Distributors specialized in related merchandise, like Mandarake or Buyee

  • Some toy and merchandise makers (Sanrio, arguably Kotobukiya in some of the lines, as well as some Takara Tomy lines)

  • V-tubers

Here you can see it summarized in a diagram:

Now that we know the industry a bit better, let’s dive into how you can invest in the different actors. But first, let's talk about some things to take into account when looking at anime as a business.

Some characteristics of the anime industry

The (right) tail wags the dog

Most manga and anime productions are not particularly profitable. Most probably aren’t profitable, or barely. But the business as a whole is incredibly so. Toei Animation owns many top-tier properties13, but 70% of their overseas revenue comes from Dragon Ball and One Piece. In IG Port’s case, the biggest 3 IPs last period (Kaiju n. 8, Attack on Titan, Haikyu) represented 57% of their copyright business revenue, and they are big properties… and yet, either one of Dragon Ball or One Piece alone would be several times bigger than the entire company.

So what you can expect here is relatively few productions driving profits for the whole industry, and it pays to bet on quality, either by selecting IPs that are already time-tested and have proven to be evergreen but are under-monetized or growing, or by betting on the taste of some company, expecting then to gain share leaning on an already existing fanbase. Take into account the volume is huge: there are about 300 animes listed in MyAnimeList as airing right now, and 540 listed as upcoming, and most of them will air, fail to get any interest and sink into obscurity. Hundreds of titles come up this year. Many of them will be profitable or break even, but not in a big way. A single-digit number will be really successful, and one or two will be mainstays, in the sense Ghost in the Shell or Sailor Moon are. Long-running successes like One Piece don't come up every year!

What I mean by that is that you don’t usually want to play the volume card here, even if there is some cost advantage. A player with hundreds and hundreds of titles can be a lot less valuable than a one with a few A-listers.

The growth is in monetization, not eyeballs

It is difficult to put a number on it, but international anime audiences have not grown at 20% per year for the last decade. Every kid already watched Pokemon in the late 90s, and while there is a significant segment of the adult population that now pays attention to it, minutes dedicated to anime are unlikely to have multiplied by more than 5. Money coming from overseas has, however. And in Japan merchandise has bloomed as well. Part of it is, however, internationally driven, as explained here:

Animenomics

Cross-border anime merchandise sales jump

This is your weekly Animenomics briefing, covering the business of anime and manga. Today is Wednesday, March 12, 2025…

Read more

a year ago · 5 likes · Richardson Handjaja

The bottom line is that while there is some audience growth effect, the majority of the growth comes from other countries getting a bit closer in monetization of fans to Japan. Extreme monetization and dedication to hobbies have long been more common in Japan thanin other countries, outside of a few niches14. It has been an increasing trend in Western countries too, where things like adults buying merchandise and figures were extremely rare a couple of decades ago. So far, the trend shows no sign of stopping, and the increase in cross-border merchandise sales points to significant unmet demand, with fans buying directly from Japan.

But what this means is that we should look for companies that benefit from this either through royalties or direct sales, rather than companies that benefit from an increase in exposure only (namely distributors15). To be clear, there is growth in that area too, and anime IP being both more popular and appealing to a wider age range is important for paid media, like videogames. But my impression is that the increase in monetization is by far the biggest variable.

No longer exclusively Japanese

Many specialists would disagree with this, and it is false if we take a strict definition. But with the HoYoverse (China) being the most productive anime-like set of games around, and Solo Leveling and Tower of God performing well in the last few years (both Korean in origin, although the animes are Japanese), I think we can start to consider other sources of IP inside this trend16. Japanese tropes and communication are far more familiar to any other country, given that they were the trailblazers, but that is not an insurmountable advantage.

And now, Devil May Cry, a Japanese videogame franchise, has an animation series… financed by a US company (Netflix) and animated in South Korea as well.

Most title’s ownership is very widespread, and everyone wears different hats

This is a right-tail business and most titles fail. And that is the reason the Production committees exist. It is just a form of insurance, but it also severely limits the upside.

Take for example The Apothecary Diaries, one of the most popular titles in the last years. The anime rights are divided between Toho, Square Enix, Nippon TV, Shogakukan17, Dentsu and Imagica. Percentages are unclear, though it seems Toho takes a big share in this case. In Jujutsu Kaisen, at least MBS, Toho, Shueisha and sumzap (CyberAgent), and probably MAPPA18. In many cases, the participants in the production committee are not even public.

And this means that sure, no one will suffer a lot if the anime flops, but also the profits of the ones that work out in an outstanding way have to be shared, and that means that unless the company is very small or has a very big share of the committee a huge success might not be transformative for them. IG Port is a mixed example. Attack on Titan has left a lot of money for them and allowed further investment aside from tidy profits… but given the scale of their licensing revenues, it is clear they are not taking the biggest piece of the pie and what would have been fully transformative had they invested more is just a very nice contribution to the business19.

As for the different hats, almost everyone does. Bandai Namco might be an extreme case. They have their own studios, own some IPs that were created to sell toys (Gundam), participate in production committees and are a licensor both for merchandise and additional content. But it is rare to find a pure play in a single aspect, except for some merchandise makers and Toei Animation.

A look at the investable universe

Anime studios

If it is a pure anime studio… they are typically not very profitable, or at least not for long. Competition is fierce, and there is no limit to the number of people who want to work in the industry. Schedules and money are tight and profits are rare. So why would you want to invest in companies fitting this?

Well, because it wasn’t always like that. Up until the 90s the saturation of studios was not so excessive, and that allowed for profits. That, in turn, allowed some anime studios to participate meaningfully in the production committees of the animes they were making, and that has kept making money for them and allowed them to reinvest. Having some outsized successes where they were able to participate in the royalties has helped big time. They are also the only ones that are public20, so you won’t have to look too hard. Still, something to keep in mind if more become public.

So what you need to watch out when looking into anime studios is a strong set of existing properties and, if possible, a good cadence of new releases, wether they are refreshing old IP or creating new one. Or both! The examples I was able to find were:

• IG Port: A company I have discussed in the past here, but where the valuation got high a bit quicker than I expected! They have made several well-known animes, and partially own the IPs of Attack on Titan, Spy x Family, Haykyuu, Ghost in the Shell and Psycho-Pass, among others. Probably the most active (of the public ones) in adding new IP to their portfolio with Spy x Family and Kaiju n. 8 being very recent incorporations.

• Toei Animation: A classic. Tiger Mask or Cyborg 009 were well-known in the 60s and 70s, Mazinger-Z in the 80s. And nowadays they make tons of money from Dragon Ball, One Piece, Digimon, Slam Dunk, Precure, Sailor Moon… the sheer amount of productions based on well-known mangas they did in the 80s, 90s, and 00s still drives their revenue, even if it is thanks to new content for their franchises. They haven’t been able to add much to their roster in the last 20 years though, even if they have had some punctual success (Girls Band Cry, Id: Invaded) very, very far from the heights of their aging IPs. They are aging quite gracefully though. Honorary mention to Toei Company, which owns 40% of Toei Animation21.

• Nippon Television Holdings: We should probably discuss it as a domestic distributor, but Nippon TV is a mix. Aside from their TV business, they own both Madhouse (Death Note, Frieren, One Punch Man, Parasite, Hunter x Hunter…) and a majority stake in Studio Ghibli22. As a distributor, they have been able to participate in many relevant production committees too (Apothecary Diaries, Nana, Claymore…). Anime represents about 50% of their current revenue growth and all their profit increase YTD, while distribution revenue (adds, TV-related events…) still represents a much bigger share of all revenue. So they are slowly but surely becoming more of an anime IP company.

TMS is also public through its parent, Sega Sammy. However the weight in the conglomerate is relatively small (less than 10% of revenue, although it has a better participation in profits), so it doesn’t make sense to describe it here (even if it is a growing segment for Sega Sammy).

The good thing about investing in the public studios is that they all have established IPs, and funding enough to go ahead investing in new properties or iterations of the same. As they have access to the IP, they do profit from the main drivers of revenue of the anime expansion mentioned above.

IP owners

The case for investing in IP owners is almost obvious. They have relatively low costs (producing manga is a lot cheaper than anime), and decent library of IP to draw upon. Most of them are, sadly, not public.

Essentially, the manga market is dominated by four editorials, two of which are actually part of the same group: Shueisha, Kodansha, Shogakukan and Kadokawa, with the first and third belonging to the same group. Three of them are private, and they also own almost all the really big IPs23. There are two relevant publishers that are public24, Kadokawa and Square Enix, but publishing is not their only business. In the case of Kadokawa, it is more relevant in proportion.

I covered Square Enix’s manga segment here. Kadokawa is bigger and has a much bigger library. They have been leaning into anime recently, with internal studios and the agreement with Sony, and have always invested as producers in adaptations of their material. However, I don’t particularly like Kadokawa, and I think the next two screenshots, from @Josu_ke’s amazing work on 2024’s manga market, explain well why

This only covers the physical market, so no digital sales counted here… but the reality of Kadokawa publishing a lot of not-very-popular works (publishes 4 times as many volumes as Square Enix and sells less than 50% more) is visible. That does not mean they don’t have interesting IP, they do (Sword Art Online, Konosuba, Bungo, Made in Abyss, Delicious in Dungeon… we could put Your Name here as well25), but in a business that leans heavily on the right tail, I don’t want to bet on the volume player, and the fact that they have the number of publications as a KPI is not something I like as an investor. They are also the parent company of FromSoftware (Dark Souls, Elden Ring), so not saying the stock is not interesting. But they have lower margins than their competitors for a reason.

There is a third IP provider that hails from South Korea and trades in the US: Webtoon entertainment. Their finances are not great, and they lost almost $145 million last year, with relatively lackluster revenue growth (5%). They went public last June and have lost more than 60% of the value since, while it still trades at close to $1B (and an EV of 1.5B). It is the parent company of several webtoons, and also Wattpad, and they have high revenues. They also emit SBC like crazy, and are owned mainly by Naver Corp and Softbank, with only 13% or so being free float. They have some mildly interesting IPs (Tower of God is the main one that comes to mind), but I find it expensive for what they do. Most of their revenue comes from paid content in their webtoon and ebook platforms, and at their scale and with their terms that is a low-margin business26. The theory was that being able to leverage that IP into royalties would yield great results, but so far that is not happening, and their latest investment has been an anime studio (Project no. 9) without any great hits on their back.

National distributors

It is usually said that very few public companies are related to anime, but some are a bit more hidden than others. And I am talking about Japanese television networks and their holding companies.

In this case, we are generally talking about companies with a deteriorating business (linear TV) and then some forays in streaming or providing content for streaming platforms. Japan being Japan, it is not uncommon for them to also dabble in other lines of business (hotels, events, real state… the works). In general, and in regards to anime, there are things that can make you wary. The main one is that viewership, and especially local viewership, is not the driving factor in growth for the category, especially on linear TV.

But there are two things that can make them interesting in terms of anime. First, they are part of many production committees, as they usually are part investors of many productions that are or were aired in their channels, and in case they landed good IPs, that can help a bit, although they don’t usually report how big that stream of revenue is.

And then you have the cross-shareholdings. Depending on the case, they can be a very significant part of the market cap, thanks to the practice of getting shares in businesses with whom business alliances were made. It is not uncommon for them to have shares in companies like both Toeis, IG Port, Kotobukiya, Toho…27.

The main ones28 are:

• Fuji Media Holdings (4676): It has re-rated quite a bit thanks to a sex scandal29, but they have decent rights (including some piece of the action in Dragon Ball, albeit small). Animation and merchandise revenue is tiny for them at the moment, but it has been increasing over time. And they have sizable stakes in both Toeis, Toho, and, truth be told, many other companies, amounting to about a third of their market cap, although their cash generation has been reinvested in a big way in real state, so make sure to check that part!

• TV Asahi (9409): Apparently a much smaller company than Fuji (roughly half the profits and revenues), the combination of its low valuation (260B yen), cash on hand (70B) and cross-shareholdings (more than 240B yen) make it interesting. The main holdings are again the two Toeis, Recruit Holdings and KDDI. Sadly, they haven’t taken measures to reduce it, but there is a lot of value here waiting to be surfaced.

• Tokyo Broadcasting System - TBS (9401): They have stakes in both Toei Company and Toho, but tiny compared to the market cap. They haven’t participated in a lot of well-known animes as producers, so there is not that much coming from rights30. Not particularly interesting from the POV of anime, as they seem to produce a lot of fodder to fill slots in their programming, mostly. The ads side of the business is still doing fine however, and they have been able to keep costs in check, so they are doing well in general.

• TV Tokyo (9413) is the odd one in this list, in that it really leans heavily into animne, with about 20% of their revenue coming from anime rights, and growing. They have been investing in successful franchises (Naruto, Spy x Family…), and they have made it a top priority in 2024. They also have valuable legacy IP (Captain Tsubasa). I am a bit skeptical, because costs are increasing even on the TV side, but interesting to watch. They do own a small cross-shareholdings portfolio as well, but is small versus the market capitalization and they have already been reducing it.

That aside, we also have Toho (9602) which is a different kind of distributor, more focused on films and also the owners of Godzilla!. The thing is… they are leaning heavily into anime of late. The acquisition of GKIDS to try to dominate distribution in the US, especially to cinemas, is part of it. The acquisition was not particularly steep for Toho, at $140 million31. But Toho has also been working hard at investing in successful productions. Spy x Family, Haikyuu, The Apothecary Diaries, My Hero Academia or Jujutsu Kaisen32 are some of their main titles nowadays, and they have put it at thee center of their new strategy. And that is paying out, with the production and licensing segment being now about 25% of their revenue and a bit more of their operating profit versus 12 and 10% in 201933. Thanks to the massive investment in the area they are making, Toho is pivoting from being a distributor and participating as a producer to being a full IP owner (including production studios with major hits). A pity that it is also saddled with a cinema chain34.

Merchandising licensors

This is probably the category with the fastest growth, judging by what I see overall. Not only is it still growing domestically as we saw in the numbers above, but it seems to do the same externally. Take Bandai Namco (7832) for example. Their Toys and Hobby line went from 222B yen in revenue in 2018 to 509B yen in 2024, and FY25’s first 9 months still show 19% growth. This far outpaces the local growth according to AJA, and that is a situation we find across publicly traded companies.

• Square Enix’s (9684) merchandise division has doubled since 2021, multiplied by 2.5 since 2019.

• Kotobukiya (7809) has doubled sales since 2019, although their max was in FY23. It is a pure-play, but has been losing ground of late and its margins are not as big as its product (essentially highly priced figures) might imply. They sell collector’s items at a great premium to manufacturing costs, but between royalties and lack of volume, they don’t get that much out of it.

• Furyu’s (6238) MD segment has multiplied by 2.6 since 2020, but they face pressure because of the decline of their other business (and the lack of relevant IP and a distribution advantage makes their margins slim, together with the focus in the gacha prize category. They are gaining share though!)

• Bushiroad’s (7803) TCG unit has roughly tripled since FY20, while the pure merchandise one is roughly flat until FY24 (though FY25 is seeing it double). TCG is much bigger for the company though!35

• Takara Tomy’s (7867) T-Arts division, dedicated to gacha prizes and similar collectibles, has been slower, tripling sales from 2008 to 202436 and growing at double digits in the current financial year. The rate of growth is more consistent with AJA’s, but accelerating.

Granted, those numbers do not only include anime-related sales (Square Enix sells figures for Final Fantasy and NieR, FuRyu sells v-tuber plushies, Kotobukiya has their own IP for some lines…), but all is adjacent and should line-up, roughly. And that doesn’t even take into account merchandise made by companies outside of Japan.

That said, other than for Square Enix and Bandai Namco, profit margins in this area are slim, and what both have in common is their own IP37. Even in the cases where the IP is not their own, Bandai Namco has a dominant position in terms of distribution, and is so connected to other anime companies through production committees and existing deals that they can keep acceptable margins38

While pachinko companies also do machines based on anime licenses, and it is part of what drives gamblers to those particular machines, I hesitate to include them here because I don’t think it is the main selling point of the machines, while here the IP is the point.

Additional content licensors

Many games and videogames have been licensed, but it is rare these days that the majority of the business depends on that, rather than being a game developer that takes all types of licenses and original IP. Bandai Namco makes a lot of anime-based games (Dragon Ball, Bleach39, Naruto…), Sega Sammy also does a few (Demon Slayer).

But I don’t see any as a primary play here, except maybe Akatsuki (3932) due to their dependence on Dragon Ball mobile games. You can read a detailed pitch on them on AltayCap’s blog (it has done fairly well since!), but I think it is more accidental than a deliberate choice.

Anime-adjacent & others

I think the popularization of anime is helping others gain ground, mostly overseas, so I think it is worth it to spend a second looking for companies that don’t fit the prior categories, but are related. I am sure I will miss some!

In the merchandise area we find:

• Sanrio (8136): Everybody knows the Hello Kitty company and their incredible run (which I have missed, to be honest!). They sell kawaii. Might not be licensed from any anime (though they did their own for a bit), but the rise of anime surely helps!

• Happinet (7867): A distributor focusing on video games (software and hardware), toys (managing part of Bandai Namco’s distribution) and video and music. They have grown really well, and started to invest in IP (they appear in several production committees from 2018 onwards). The growth has come from taking share on the toy/hobby and videogame distribution market and an outstanding management of their amusement centers. Their video and music business has not been that good, partly because the anime investments have, so far, not panned out.

• Mandarake (2652): I wrote about them a while back. I am no longer so bullish on them, after seeing them failing to profit from both the tourism boom and growing demand outside Japan, and I no longer have a position40

Then we have CyberAgent (4751). They are a curious company. They have a media segment that includes a controlling stake in Abema41, and that has been their main drag in the last few years, as it was deeply unprofitable. As Abema grows in scale both in the ad-supported version and the paid one, that situation is starting to turn. But there are many streamers in Japan (Hulu, Amazon and Netflix, of course, but also U-Next). So in part they are a national distributor, and they do intervene in some productions as such. But they also have an online ad agency business, and most important of all, a videogames business where Umamusume Pretty Derby, Shadowverse, and Granblue Fantasy are the biggest IPs, all greatly influenced by the tropes and aesthetics of different types of anime. Umamusume (a mobile game) is going global soon, after many years as a Japan exclusive, so let’s see how that goes!

And of course, we have my favorites: v-tuber companies. Anycolor is currently more focused in Japan, but Cover Corp derives a lot of its revenue and growth from outside the country, and it would be unthinkable for that to happen without anime’s prior success. I already talked enough about them here, so I won’t bore you further

Some video game companies could be included as well, but I have already covered some in the past. JRPG-heavy companies like Nihon Falcom, Square Enix or even Sega Sammy (Atlus, RGG) would fit the bill42, but I have discussed all of them in prior articles already!

Research tools

Well, we have gone over what the growth in the sector looks like, some of its characteristics, and at least some of the public companies that are related to it.

I think now is the time to talk about how to research an anime company, or at least some of the things I look at.

The first thing to check is how popular is their IP really, and who is involved in the production. And for that, we have MyAnimeList and Anime News Network.

What I usually do is I use MyAnimeList to check for popularity, although you have to take into account that it tells you more about overseas popularity than Japanese one, and it doesn't reflect well the popularity of shows aimed at children. The number of members and average rating can help you understand the ballpark in which you are moving, although it is far from precise. You want to see at least a few hundred thousand for a mainstay IP.

The second is to check the fan base. Now, after a while in this area you get a feeling for who watches what and the type of fandom they have, but still, Reddit is a fantastic tool for overseas fandom. For any given popular anime, you will find a subreddit and be able to gauge, more or less, if you are dealing with a predominantly female or male community and also the age it reaches. As examples you have Solo leveling (power fantasy aimed at teen guys), Frieren (theoretically aimed at the same group, but with an audience with a bit more age and genre range43), or Fruits Basket (target demo being teen girls). This is important because women tend to spend more on merchandise, although there is a fair bit on additional content spending - that is, games- going on on the male side. So you want to know the demo it is hitting, and then go to the next step!

The third step is to check how well monetized it is. You can go to Buyee, Bandai… and check what you get in those stores. It is good to see all types of figures, but if you see really premium ones (say $300+, though it is an arbitrary line), you are likely to have a very hooked fan base, whether it is very extensive or not. It is also important to check if there are ranges of gacha prizes made for the series, as those are important for both revenue and exposure. I would also check Steam, especially for Shonen, as that can be a relevant part of royalty revenue (although far from merchandise).

Of course, it only pays to do this for the biggest properties in a company. Toei has made hundreds of things, don't go checking each one!44

And talking about Buyee, at least until they are acquired45, Beenos, their parent company, publishes interesting data from time to time, hope they continue!

But there are two real treasure troves of information out there too. The first is a newsletter as well, and a must if you want to follow anime as an industry. You might already have an inkling because I have cited him a couple of times in this article alone, but I am talking about , by . If there are relevant news or trends about the industry, you will get them in the newsletter, well distilled and with sources.

And another is actually about the manga industry, and focused on the physical market. While he uses data that is publicly available (mostly, though not only, from Oricon), the infographics and summaries @Josu_ke makes are fantastic. Not only the annual review I linked earlier but also weekly and monthly summaries on sales that you can find in his Twitter/X profile.

Conclusion

Anime has been growing in popularity internationally for many years now. The 80s marked the first exposure to it in many countries, and it hasn't really stopped capturing the imagination of people. It has in fact increased its reach, and now encompasses several generations… and that means it is easier to get share of wallet now than it was a few years back.

Now, the US is a big part of this growth, and tariffs might hurt it in the short term, as a big part of the merchandise is currently manufactured in China, but I don't think that will change the trend meaningfully over time, even if there is a bump. Large companies, like Bandai, already split their manufacturing in several countries even if China plays a major role, which might help dampen the impact, but many others rely only on Chinese manufacturers46.

Personally, I think what is important is to find companies that either own strong and relatively under-monetised IP, or that are able to consistently produce high-quality content that is slowly improving their catalog. Easier said than done! But still, as Toei Animation's increase in earnings shows (4x since 2016), and increase in royalties from Dragon Ball (2025 will probably be a new record, given it is already very close to 2024 with 1 quarter left) proves.

I will try to review some of those companies in the coming months, hope you will join me!

A bad release, but not a bad future

There is no way around it, Q3 earnings release was not good and the revised forecast is bad too. Despite that, I am moderately optimistic about the company. First, let's look at the overall release and the forecast

A downgrade of revenue by 20B yen (about 130 million USD) is not great, especially when it is across the board, with both Pachinko and Entertainment Contents (anime + videogames + toys) going down. Profitability, however, suffers a lot less. It will go a bit worse than expected in the Pachinko segment, but better in EC. Let's review the segments in more detail.

FY24 was a fantastic financial year for Sammy thanks to Fist of the North Star pachislot's success. In the last year, they failed to find similar success and sales are back to FY23 levels. Which is a bit disappointing. I had expected a bit more from their releases this year (basically that they would have been able to hold to the initial forecast (which already took into account a reactionary drop.

It will still provide very decent profits, but calls into question the durability of the business if they can't keep maintaining the share gained last year. Little else to mention on the domestic front of Pachinko and Pachislot. Hopefully they can keep at least these levels in the coming years, while the industry slowly disappears.

The only bright note in this segment is the gaming segment (that is, slot machines) which is still tiny but growing at a good pace. Q4 sales are expected to be the best ones yet, and accelerating. But it is still a subscale business that loses money (that non-operating income comes from the participation in a resort in South Korea). That said, losses in Q3 were minimal (0.1 billion yen), so seems profitability is improving with increased sales.

In entertainment contents things are a bit muddier, because of the different dynamics that we have mixed there

Animation is doing fantastically well, and doubling its forecasted operating profits to almost $60 million thanks partly to the Sonic film contribution1, but also to Baki, Blue Box2 and the release of Sakamoto Days in Q4.

Amusement machines and toys are not doing great compared to forecasts, but still doing far better than last year, both in revenue and profit. Still a segment I hope they eventually divest or reform very deeply.

Consumer (aka videogames) is where the fun is at. They are generating more revenue than last year at this date, but not by much, and last year there were two very big releases (Infinite Wealth and Persona 3 Reload), while this year the calendar is less packed3. Let’s dive into the causes of underperformance:

• F2P is underperforming greatly, losing about 15% of sales YoY and going to miss initial predictions by more than 20% (at a 10.4B yen miss). This alone explains most of the 15B yen gap. Decline was expected (all other games, including Project Sekai, are already old), but management was guiding higher because of expected releases… that did not happen. Let’s look at them:

  • Sonic Rumble seems to be stuck in eternal pre-release, and despite more than decent reviews and good use in some countries it generates no revenue because the operations are not run in that direction. At the same time, the pre-registration campaign is unable to arrive to 600k pre-registrations… probably because it does not even explain well what is a pre-registration or what counts in Steam… I mean, it is a bit of a disaster. Release date remains undisclosed, and it is available in half the globe meanwhile, but without much marketing or operations. I truly don’t understand what they are doing with this game, and would love to interview whomever is in charge, because there has to be a reason for something so bizarre.

  • Persona 5: The Phantom X was supposed to come to Japan during this fiscal year, where it should be operated by Sega directly, and that has not happened. I suspect the performance in Taiwan and South Korea not being great has helped, but they have announced no cancellation (it is in the release schedule, just without a date).

• Metaphor: ReFantazio sold well in PC, and that drove me, and I think many other people, to think sales were better in console than they have been. Given that all put together is about 1.5 million units4, that does not seem to be the case. Seems to be both outperforming P3R in PC, and underperforming in console. Not a financial failure, but seems like Sega expected more, given the slash in sales forecasts for new games… together with the next item.

• Football Manager 25 cancellation was announced along with the earnings5. This series has been selling about 1-1.5 million copies a year, plus Xbox/Apple/Netflix revenue. So it is a big hit to earnings, especially since some costs have been written down. The mismanagement of this game’s release deserves a case study, and is probably the worst I have seen, other than outright scams.

  • It was expected for early November, and preorders were opened.

  • A bit later, the release date was given as the 26th of November, which already irked some people.

  • 10 days later, the release date was pushed back to March, with no specific date

  • Then last week, on Sega’s results presentation, the cancellation was announced (with preorders still open on Steam)

In the case of FM25, I think they got to a release-able-ish state very late, and decided to cancel to avoid the reputational hit. I think this is a mistake and they are going to get it twice, because the first iteration of a new CM/FM engine has always been a bit of a mess (player feedback is relevant, as is to see how they actually use the features added). Now they have already had the hit of missing a release with multiple delays, and FM26 will get the hit of being the first of a new series. Sales were going to be pitiful and reviews bad anyway, at this point. Just with they had gotten on with it at a reduced price and called it a day. Probably I am missing some reasons why that was not a good idea.

This has been partially offset by the back-catalog performing really well, thanks especially to the Persona and Total War series, with Sonic actually having lower unit sales than prior years despite the successful Sonic x Shadow Generations release. After Sonic 3 was released, Sonic back-catalog titles went up in sales in late December and January, so probably that will improve a bit in Q1. Also, the other category has been performing really well, despite including Rovio (which is performing way below forecasts). Licensing revenue must have skyrocketed to cover for it and actually deliver an increase in revenue.

In terms of the new forecast, I have no opinion on Pachinko, it really has been a mediocre year. On consumer, I don’t think they are lowballed on the videogames side. They are forecasting $340 million in revenue in Q4, with $50 million coming from back-catalog, about $80 from F2P, $140 from other (Rovio and licensing, mostly) and $70 million from new games. The mix will probably be different (I suspect F2P will be a bit short again, and back-catalog a bit better), but I don’t think we will see massive surprises on revenue, unless LAD: Pirate Yakuza in Hawaii outperforms by a lot6.

Why am I still optimistic regarding Sega? Well, despite all these things failing (and it has been an anomalously bad year in that regard), this is on track to be the best year for the Entertainment Contents segment in more than a decade7.

Where does this leave Sega Sammy?

The company is still relatively cheap, in my view, although less than it used to be. At about 640B yen this is about 13x EBIT (expected at 53.5B) or 17x expected earnings, you are paying for the current performance of the company, but not for the optionality it has.

What optionality? Well, this is the evolution of the entertainment contents segment since FY20168, with FY25 being a record year in both revenue and profit if estimates hold (and when they are this close, they have tended to estimate lower if anything, though maybe not this time!)

And the changes in margin profile.

As you can see, the segment has been doing well overall, and the COVID margin improvement has mostly held in two very difficult years for the videogame industry. And that has happened despite several high profile mistakes. It is a pity, because this should have been a banner year for Sega, and it would have been with FM25 not cancelled and Sonic Rumble well rolled out.

But the situation is still the same, and arguably a better long term set-up than last year. Sonic IP revival is proceeding well, with Sonic 3 making a $470 million box office haul and becoming the second best selling videogame movie9, Atlus is generating fantastic JRPGs and RGG is creating excellent games10 as well, and Creative Assembly has recovered quite a bit of the goodwill (and part of the sales) thanks to Pharaoh Dinasties and the last two DLCs for TW:W3. We have a number of interesting releases to look forward here in the coming years, namely the continuations of Persona and LAD, Sonic games (racing has been announced, and we should get a new mainline announcement during the year, I think), Alien Isolation 211 and all the IP revivals.

Amplitude and Relic are now out of the family though. I completely understand the decision on Relic, despite the fact it was a studio with a really deep history in RTS. Amplitude… not so much. I think they had a lot of potential to challenge in 4x games, and just needed a bit better direction. But alas, they will have to find that on their own12 13.

There are additional good signs. Sonic 3 revenue allocation aside, TMS has been doing well in animation, and has slowly transitioned to participate in the production committees as well. Blue Box is a good (and successful) example of that. And as of Q3 has already surpassed the prior combined record operating profit of Animation and Toys put together, forget about Animation alone.

On Sammy’s side, for me Pachinko is still a melting ice cube and slot machines an open question (though one progressing well). But the Japanese integrated resorts that will open in the coming years will be a boon to Sammy, as well as other equipment providers, and that should help a bit (though I suspect there are better ways to play it).

And in terms of capital allocation, the share count keeps going down, although more slowly. I don’t love the M&A (Rovio, GAN, Stakelogic), but at least there is some plan behind it.

Sega clearly does not know how to do F2P mobile, and they are proving it again with Sonic Rumble. I just hope they just let Rovio play with the Japanese IP instead.

And that is all on my side for Sega Sammy’s results. I still have a position (although a slightly smaller one after the run, have to keep the portfolio a bit balanced!), and I think it has good odds, but it is not as incredibly undervalued as it was a year back.

A quick round of portfolio updates

I have made some changes recently in the positions I have mentioned in the past, so might as well get tell you all!

• I sold both Embracer and Asmodee. Embracer was at around 180 when I mentioned it here14 and I sold at around 26015 (adding up Asmodee and Embracer). Not a bad profit for a few months, and I don’t trust management in the long run, let’s see how clear are Asmodee’s now that it is a bit more independent.

• I took a small position in Mandarake again. Ready to be burned a second time, I guess! Will be following the results and monthly sales data with interest to see if the reversal I suspect is confirmed… because there is a reason behind it. See… in December, Mandarake opened a store in Mercari, which is basically like any brand having a store front in Amazon. And in December sales went from essentially flat YoY the prior two months to 16% up. Why do I think there is a causal relationship, and that it can be really important for Mandarake? Well, because they had failed to increase their online sales since the pandemic, and their online store gives GeoCities vibes. And Mercari is already a hub for both foreign and Japanese collectors. For now, seems like the online store keeps selling well, based on number of reviews, let’s see how much is cannibalization and how much is additional.

• If you are interested in Cover Corp… it reports Q3 results in a few hours! I will be hosting a space in X/Twitter16 to go over them as they are published. Given that it starts right when they are supposed to go out and I have never hosted a space before, it will probably be a disaster. But I think the results will be good. Come and have a laugh if you are awake!

Since then, the stock has barely moved (up about 6%) and the results have been slightly lower than last year, although with slightly higher revenue

So why do I believe it is a better opportunity right now? Well, we will start with an obituary, follow up with a surprise announcement by Nintendo, and follow with their line-up for the year, shall we?

Nihon Falcom: Ends & beginnings

On December 15th Masayuki Kato, Falcom's founder, died. While he had left the company in the hands of current CEO (and Falcom enthusiast) Toshihiro Kondo2 back in 2007, he was still the chairman, and owned, through a combination of personal holdings and control of a society, 61.5%3 of Nihon Falcom. Kato was one of the key figures in the development of the early Japanese videogame industry, controversial as he was4.

While the implications on a day-to-day basis shouldn't be that relevant5, the implications in terms of capital allocation and also possibilities for a sale are very different now. Suddenly, the majority of the company is not under a single, very reluctant to transact, person. Capital allocation decisions might also change. With 75% of the market cap in cash and at a low valuation, both things can be catalysts for a revaluation, and I have to admit that is part of the reason why I have increased my position. But it is far from the only one.

Popularity in the West

One of the points I made in the original article was that Falcom was gaining traction in the West, especially thanks to NISA publishing most of their catalog, a big chunk of it previously inaccessible. That has reflected only partially in their revenues, and I think that is about to change starting in FY25 but especially in FY26.

Now, in terms of the popularity of Falcom games outside of Japan, especially Trails, I think there are two statistics worth keeping in mind. First, revenue coming out of North America and Europe has grown at a 33% CAGR since 2018. Granted, COVID helped, but 2023 held up, and 2024 saw a 19% increase.

That is with gaming spending roughly flat in general, sure. But more importantly, with Falcom's revenues in Japan roughly flat in the last few years, and down since 2020's COVID-assisted peak. That's because Falcom's releases of late haven't been huge successes, with the Trails series losing a bit of steam there. The lack of global releases (with delayed releases both in the West and in the rest of Asia) has also hindered the momentum of the new games. That means that the revenue growth in the West comes from more general availability and back catalog, not from new hit releases, and is supported by another anecdote. In September 2022, it was reported that the whole series had passed 7 million copies sold. In January 2024, it was 7.5 million. In August, 8 million (revealed in their interim results). In September, 8.5 million.

The reasons that acceleration, especially in 2024, didn't translate in a bigger increase in revenue were

• These are mostly sales outside of back catalog, probably with discounts in most of them.

• Mostly outside of Japan (or on platforms inside Japan where the development is not carried out by Falcom, which only covers PlayStation and Switch), where Falcom gets a smaller percentage because they don't carry out either the ports to most platforms or the localization of the game.

There was still a decent increase in revenue coming from the West. But not commensurate with the increase in copies sold. I think that the arrival of Ys X Nordics (released in the West right after closing the accounts for the year) and Trails through Daybreak II next month will help. But I think the most important change will happen later in the year, and will be reflected both in 2025 and 2026's profits.

Remake, global release and new publisher

Back in August, Nintendo surprised a lot of Falcom fans by revealing a remake of Trails in the Sky I for Switch (including the CEO of Falcom, according to Nintendo Life6) at one of their Nintendo Direct. Now, Falcom getting the spotlight from Nintendo in that way is already uncommon, as, despite the long history of the company, it is not a huge seller, so that was great publicity. Trails in the Sky was the most popular subseries of the Trails series too, so having a remake of that makes sense, updating it to new hardware (coming, as it did, 20 years ago).

Then, in December, something more was revealed. The remake is going to come to PlayStation and PC too, and going to come in the form of a global release with GungHo7 as a publisher in the West, and released with localization to German, French, and English right out of the gate. So we are getting a first-time global release, better published and ported, of the most popular entry in a series that was already gaining popularity.

And it is also not the only thing in Falcom's backlog. Falcom has been pushing only one game per year as a rule. Sure, there were ports and localizations being released at the same time8, but no more than one game from the company. In 2025, Falcom is releasing at least the Trails in the Sky remake, plus an enhanced version of Ys X: Nordics, called Ys X: Proud Nordics9, and a PS5 and a Switch port (neither revealed yet) that are happening in-house10.

So the summary is that I expect stronger sales (and profits) thanks to them taking advantage of their increasing popularity to release a lot of ports, an enhanced edition, and a long-awaited (and finally well-published) game. Along with the more open possibilities for M&A and/or capital allocation, seems like a good set of potential catalysts, although none is certain.

Games Workshop's best half (so far)

I talk often about Games Workshop, but I haven't talked about H1 results yet. There is often not much to talk about in them, because the level of revenue and profitability is known (approx) in advance, as they release a trading update with the figures a bit more than a month before, and they don't disclose that much in terms of operations. That's not the case this year, though. First, the results were clearly excellent, thanks in good measure to the royalties from Space Marine 2

But the increase in miniatures (aka core) revenue is not insignificant. I suspect it came mostly in Q2 and partly on the back of Space Marine 2, the Secret Level episode dedicated to it, and the confirmation of a live-action series for Amazon with Henry Cavill involved (all things we have previously discussed here, though the confirmation itself only briefly in the 2024 review). More importantly, we have an unusual tidbit, because Games Workshop's C-suite is not prone to talk about current performance

So the first month of the period is going well already, and doing so despite not many releases. January is a bit different in that regard, but we'll go into that later. There is also an additional sign of reignited engagement, which is the re-acceleration of Warhammer+ subscriber growth. As a reminder, this is a very limited streaming service (that also offers some exclusive miniatures and access to the apps for playing)

The most interesting tidbit for me is this, however

1% coming from mobile? Last year they made more than 4.6 million, with almost 4 in H1. And now they are reporting 0.3 for this half? I get that those 4 million could very well have been an advance for a future game, but Tacticus is doing really well, according to Sensor Tower. So what is going on here?

My suspicion, and it is only a suspicion, is that MTG11 has bee investing heavily in growing the user base (taking advantage of the SM2 push), and that royalties in this deal are calculated after CAC to allow for better investment. But as I said, only a guess. Sadly, the rest of the mobile games, like Warpforge, are not having a similar success.

Also extremely low is the share coming form other areas (Joy toy figures and the like) which usually is more than a million a half as well, and they are reporting 0.3 too. Other than a potential typo, I have no explanation.

Ok, so we know that they had an extremely successful half, and the first month of the next one is going decently in terms of miniature sales. We also know there is a suspicious slump in mobile royalties revenue (that I suspect but have no proof that is due to growth investment). What do we know about the future?

Future royalties and stock situation

The first thing we have to take into consideration is how well games sales are doing and… well, they are doing well. Total War: Warhammer III released the latest DLC in December. It did not have the outstanding performance Thrones of Decay had, but it did perform decently, well above the dismal levels of Shadows of Change back in 2023. Aside from that, Darktide has been selling really well since early December, thanks to content updates, with its best CCU count in a while.

Both things should help keep royalties high. But Space Marine 2 is probably the most important bit here. Despite having a CCU count way below Total War in Steam, it consistently ranks well in the sales charts, and let's not forget it is a multiplatform game. In any case, it only fell from the top 50 best sellers for a few days in early January, never going too far from that, and it is typically around top 30-50, currently with a 25% discount. I expect it to drop close to top 100 when the discount ends, but still, fantastic run so far. What all this means is that this is still easily doing more than 10 million in sales a month12 across platforms and the guarantee was blown through. Royalty revenues in H2 are going to be just fine. I think lower than H1, because it is difficult to reach the SM2 release revenue levels, but with a less steep decline than expected13.

Equally important is the situation with miniature sales. And the company said that December was going well (up 12% from last year), but what has happened since? Well, the release train has started going on in earnest. And they are going well, by and large. The main releases have been:

• Orruk (Orks) new battletome and spearhead in AoS: Not sold out.

• Empire of Man for The Old World: Main items sold out in Europe, and only some references (and not the main ones) sold out in the US.

• Krieg/Astra Militarum in 40k: Main items sold out almost everywhere14

• Aeldari in 40k (released yesterday, as I write this): Mixed. Only Fuegan and the Collector's edition codex are sold out everywhere15, and then some aspect warriors on each geography. Vehicles are just re-releases, so they are not expected to sell out. Those are fantastic results for something that is not an army box, by the (web)way.

I think that is pretty good for the first few releases of the year. But there is another metric that gives us an idea of what increased popularity is doing to Games Workshop's logistics. Out-of-stock for the 40k range is at an all-time high, and Horus Heresy as well. AoS has also increased, although far less. The measurements are so high for 40k that when I initially saw it last week I thought it could be a temporary problem in their warehouses. But I have been getting the same consistently for a week.

As you can see, the increase in out-of-stock for 40k after November is just out of this world, and a record measure in all geographies. Hope they are busy increasing production, or at least allocating it better! Let's see the rest of the lines

It is visually less impressive, because Horus Heresy has always had crazy levels of out-of-stock in Europe, and The Old World was very short on stock at the beginning of its run. But still, you can see what is happening in 40k and Horus Heresy in the last few months.

What can I say, this bodes well if they can improve the supply situation.

IG Port delivers on Q2

Last time I commented in depth about IG Port here was about how their Q1 results were a bit disappointing, but it should only be a timing difference. Well, they did deliver as promised, but a similar situation will impact Q3-Q4, with Q3 being lower than expected, and Q4 being higher.

The half, as such, has been strange at first sight, with a large increase in revenue (almost 50%) and operating profit (almost 40%), but a much lower increase in profit before taxes (because of investment gains on their portfolio in FY24) and a decrease in net profit

The increase in net profit is because of a situation we already touched upon last time: Taxes and the structure of the group. Because of the way the group is set up, with WIT being a somewhat independent company with non-controlling interests, the losses incurred in the animation business can't be offset by the earnings obtained elsewhere. The result? An effective tax rate of 48%

Of course, that wouldn't be a problem if the animation studios earned money by themselves, but currently, they don't. I hope IG Port sorts out the pricing of the studios to production committees. I get they use cheap prices there to get in on the action, but this has group-wide consequences for tax.

That said, as the copyright (read production committees) derived business grows versus the animation one (and in particular WIT, because as far as I know this does not apply to Production IG) this should be less of an issue, and anyway it is not a situation that should hold for long (or WIT will eventually close or be fully absorbed, and then the losses could be offset).

Keep in mind when evaluating their price that the net income is depressed because of this. It is starting to get interesting again for me, although not quite there yet.

And that is all for now! I am working in the long-mentioned guide of the anime sector, but that will still take some time. In the meantime, happy to talk about any company in the area. Reach out in the chat (where we were recently discussing Remedy) or by mail (and thanks to those of you who did, always nice to get in touch and learn!)

The opportunity

tinyBuild is not a success story, at least as of now. And it is unlikely to ever be for someone that bought the IPO, as it debuted at about 50 times the current share price and raising a fair bit of money and using it to go on a shopping spree of tiny studios. Of course, the strategy of flooding the market with content was obsolete by the time they started to execute it, so results have been less than stellar. They have also been spending like drunken sailors to keep the flood coming, publishing 141 games in 2024. So why on earth would I be interested in this company?

Because they trade for about $30 million and they have one game positioned in #19 (Kingmakers) and another in #57 (Streets of Rogue 2) in Steam's most wishlisted games, and they have no debt, thanks to a capital increase in early 20242. We'll go into numbers a bit more in detail later, but it is very likely, in my view, for tinyBuild to make more than its market cap in revenue with this two releases, and the expenses have already been incurred for the most part. There are also additional considerations (flurry of launches in H2'24 that should make expenses go down and revenue up a bit), but this is the main thing.

Why now?

Because there is a significant differential between what this games can sell and the market cap of the publisher. As I mentioned in the last article, publishers and developers tend to get valued on potential success ahead of the release, while revaluation after the release itself is less common. Since both releases

What is the size of the opportunity?

2-3x in a relatively short period (pre-release) would not surprise me. First, I think Kingmakers has the potential to go over 1-2 million copies with ease if it is any good, and far more if it is really good. Hoping for Palworld levels of success is too much, it has the same vibe that got it to go viral (as Carmageddon did ages ago). It basically subverts the careful time-traveler trope and puts you, guns akimbo, in the Middle Ages. That is why basically every relevant streamer has already talked about the game. If it is any good and doesn't become hugely repetitive in an hour, it will feature in so much streaming content that it won't need any marketing budget. We have already seen that with the trailers alone!

Streets of Rogue 2 is a different animal. It has a dedicated and very engaged following, and I think it can get, with time, to 1 million copies, like the original. But in the short term (1 year) and at a full price, I would only expect 300-400k if it does well. Considering a price of $20-25, that is still massive for a company of tinyBuild's current size.

In Kingmaker's case, the haul has to be split with the developers and we don't know the percentages. But I suspect it will be around 50% in Kingmakers (with recoup)3.

This is really risky, isn't it?

Yes. And that is why I was hesitant to write about it. But some write-ups and pitches are already making the rounds4, so I wanted to get my perspective out, regarding both the opportunity and the risks.

The first risk is obvious, it is illiquid and very thinly traded (a bit below $30k daily on average). Not only that, it trades in the ASX1 segment of AIM, in the SETSqx modality. What that means in practice is:

• It is unavailable to trade in most brokers, including Interactive Brokers, as ASX1 is not widely available.

• In the cases it is available (DeGiro, for example), it only trades electronically in 5 auctions a day. It also trades through market makers, so maybe you will get better access depending on who you trade with.

The second is… also obvious I think, because it is inherent to all videogame releases and happens even to the best studios. Kingmakers can flop, and this being an illiquid stock everyone will run for the exists and the drop will be really fast. In my view, the way to manage this one is through position sizing, which is why it is a small position for me despite its potential.

The third would only happen if the second does not materialise. Let's say Kingmakers is a success, and tinyBuild gets a ton of money, but doesn't rerate much because of the low liquidity and lack of access. Nichiporchik (CEO and owner of 58% of the company) can perfectly go back to piss all the capital available in pointless acquisitions and a flurry of low/mid tier games without being too conscious about cost. I think he has learned his lesson after the need to do a capital increase to keep the company going and expenses are certainly going down… but we'll see.

The analysis

Now that I have laid out the basics of the opportunity, it is time to go a bit deeper. Let's start with a very brief history, then the current situation (as in current numbers, balance sheet and releases) and then what I think the next releases can do.

A very brief history of tinyBuild

tinyBuild started as Nichiporchik's games company. After he had dropped out of high-school, thanks to being a professional Warcraft player5, he saw a flash game6 with potential and collaborated with the original developer to bring it to full publishing as No time to explain7. That took a long time due to problems with a Russian publisher, but it was finally out in Steam two years later8. It sold decently, and the tinyBuild team was a bit exhausted from dealing with all the problems of publishing that game but had some money now, so they started publishing other games.

Fast-forward to 2018-2019, they went through two rounds of funding, opened internal studios like HakJak9. The idea was to build an indie publisher that, through good relations with the developers and some internal studios, could do good games at relatively low budgets and get good profitability. It seemed to work in 2019, and emboldened by the COVID-19 boost, they did an IPO that left the company valued at more than $400 million in 2021 and used the money of both the funding rounds and what was raised in the IPO10 to go on a indie-studio buying spree… at inflated prices just at the top of the gaming content cycle.

That left them with high fixed costs just as the videogame sector stopped growing (and even decreased a little into 2023-24). While net income grew to $11.5 million in 2022, that was only accounting-wise, as the company was spending a lot more on making more games than it was making, as you can share in the comparison between cash from operations and game development investment.

Staff cash-costs also increased a lot after the acquisitions, doing more than a 3x from 2019 to 2022. SBC went down after they went public, of course (mostly related with the lack of new rounds/IPOs making existing plans change valuation). While revenue increased thanks to the acquisitions and new releases, it failed to recover costs, and that is why the gross profit is negative in 2023 (a write-down of capitalised game costs).

In late 2023, with the company about to go under, tinyBuild embarked in a cost-cutting program, closing a good chunk of their internal studios, including Versus Evil (a publisher bought back in 202111) and HakJak (cancelling Pigeon Simulator while they were at it). Simultaneously, they were working on a capital raise of about $12 and doubling the share count. Most of it was subscribed by Nichiporchik himself with money from the IPO, bringing his ownership to 57.9%, but Atari12 (7.9%) and Netease (3.2%) also participated. And that is how we started 2024.

tinyBuild in 2024 and coming into 2025

H1 2024 was not that great for tinyBuild. It was kind of a new start, without some of the prior footprint, but they still had a lot of development going on and they still burned through too much cash. Almost $7 million, once you back out the sale of some IP assets

Now, that leaves them with 9 in the bank, and a hopefully reduced burn rate. As you can see, the capitalized development costs have decreased greatly in H1 versus the last 2, and administrative expenses also went down by almost 20%. That was, however, not enough to get to profitability. The structure is simply too big for the current revenues, and there is not a lot of runway left. At the pace seen above, one half, and then more capital raises would be needed.

H2 probably will bring a further reduction in costs though, and maybe even a small increase in revenues, if only because of the amount of releases rather than its success. Deadside and I am Future came out of early access, and other 2 DLCs and 7 games were published in H2. None of them had fantastic sales, but the combination of getting some revenue out of them and stopping the development costs13 should improve the cash flow, letting them get at least another H more worth of cash burn. Do I expect a cash-flow-positive H2? No. Just a reduced burn. 2 million of cash outflows in H1 are related to legal settlement, to that should also not be a factor anymore.

Fair warning though: they still have a lot of trade payables outstanding (money owed to external studios for development milestones and sales), about $6 million more than receivables. So if that were to unwind completely, they would be in trouble. But that is unlikely.

Revenues were also down (expected, due to the lack of relevant releases in H1, and H2 is also not stellar!), but as mentioned before, costs went down a bit too.

The summary of this is that tinyBuild has, I think, at least H1'25 to live without the need for further capital. And that is really, really important. Because their two most expected releases are supposed to happen in Q1, and they should bring more than enough money.

The next releases

tinyBuild actually has 3, not 2, releases with good potential. Sand sits at #47 in steam most-wishlisted as I write this, and it could be a success too. But it doesn't have a release date, so let's forget about it.

Streets of Rogue 2 sits at #57. The first one did around $8 million in sales14, which would mean about $5 million to tinyBuild in revenue if it were to repeat the performance. I don't think it can go beyond $10 million at best, and that would be overtime, with most of it in the first few months. Now, 5-6 million in incremental revenue would still be huge for a company that capitalizes less than $30 million, but not hugely transformative, just a really good year. They still have a solid back catalog that brings around $15 million each half.

Kingmakers is a different animal. First, it sits at #19, and second it is likely to be priced higher, in the $30-40 band rather than in the sub $20 one given the graphics and hype. How much can a game like that make? Let's look at recent releases that were either middling in this tier of fame or successful but not hugely so.

• Planet Coaster 2 was way below that position, but released in Xbox as well. It had a botched release, but still has managed to sell more than 400k copies and generate around $15m in revenue for Frontier Developments in the first month (I guess around 20 to date).

• House Flipper 2 had a similar position to Kingmakers in wishlists, but lower actual listings and no heavy marketing behind it (PlayWay being famously stingy). It has passed 600k copies in about a year, generating a similar revenue to Planet Coaster 2 so far but at a lower price point (slightly higher probably, we don't know exactly).

• Granblue Fantasy: Relink was around the top #30, and managed to sell more than 1 million units generating $40+ million in revenue for CyberAgent in Steam alone, although the price point is premium in this case.

• Persona 3: Reload managed to sell more than 600k copies in Steam alone (across all platforms it probably has crossed 2 million at this point) from around top #30 as well. Revenue estimates from steam alone are also around $40 million (again with the help of premium pricing)

These were not huge successes, but also not terrible flops. The thing is a middling but not terrible release has the potential to earn almost all the market cap in revenue. And I suspect Kingmakers can do better.

In terms of momentum, it is holding up really well. When it was announced the release was going to be in Q1'25, despite being an early access, it jumped from #21 in wishlists to #18 (with the new Elden Ring pushing it back one place later), and it surpassed 1 million wishlists a while back. Since then, it has held up nicely in two areas. One, Google trends

With interest holding up over time after the latest information was set. It is decent interest in terms of magnitude. This is how it holds up against Borderlands 4, a recently announced and much awaited sequel (Borderlands 3 sold about 18 million copies)

Sure, Borderlands 4 has more interest, but hell, might as well. To be fair, this comparisson has a bit of cherry picking on it, as we could compare with inzoi and it is a lot less flattering. But I think it gives an idea of the magnitude of interest. Not incredible and guaranteeing millions of copies. But fairly decent. It also gives an idea of the magnitude of the viral peak around the initial announcement, and that is important.

Another area where it is holding up is is new followers in steam. As of today, 8 of the 18 games that are above it in the Steam most-wishlisted classification are gaining new followers slower than Kingmakers, while only 3 of the next 31 (that is, top 50) are gaining them faster. Followers and wishlists correlate, although not perfectly, and are a pasable measure of existing new interest.

But the virality factor is the most important part here. Kingmakers is a game made to be viral and streamed. It is a bit of a meme in itself. So if the game does not completely suck this is going to be streamed non-stop. And that drives sales up a lot, and should supercharge the capacity of selling of the game.

Now, it could be that the game is insanely repetitive and you have exhausted it in a couple of hours (in terms of interesting situations), and then it will be a flop. But it has clear potential to sell 1 million copies or more if it turns out it is a good game.

And if that happens, tinyBuild is going to have a lot of money in their hands.

How to play this?

Videogame releases have a lot of uncertainty, but right now the risk/reward in tinyBuild's case is very skewed. Personally, I think what will happen is that tinyBuild will partially re-rate ahead of release, and if that happens, I will probably not go through the uncertainty of the release itself. What would be an adequate re-rating? I don't know. $60-80 million seems still cheap, but tinyBuild is so illiquid and difficult to access that maybe it would be fair at that range. Then again, Frontier trades at about 4 times their market cap with, in my view, worse prospects.

A potential bonus is that Streets of Rogue 2 might release before (in fact, I think it likely), and if it does well it can help a lot both in valuation and fundamental value.

If it doesn't rerate ahead of Kingmaker's release (which is in Early Access), I will decide holding or not depending on how it is holding up in terms of interest and response to new material as it is released. After all, they have other interesting releases, but releases are risky, and while I think they have learnt their lesson in capital allocation (and they have sold some IP and reduced their footprint), there is still a lot to prove. But we will cross that drawbridge when we get there.

Probably in a motorcycle, uzi in hand.

Disclaimer: I own shares in tinyBuild at the time of writing this, and this is not investment advice, just what I am doing at why. Do your own due dilligence, stocks this illiquid are risky at the best of times.

What I am going to talk about today is something I have seen in several places, most prominently from TenchInvest (@10_ch_10 on X), and it plays a lot on human psychology.

But first, let's talk about one of the relative successes and surprises of 2024: Space Marine 2. Or rather, about Pullup Entertainment, the parent company of Focus Entertainment, the game publisher.

A tale of two games

Or rather, two stocks. This is the performance of Pullup Entertainment in the last few months. Keep in mind Space Marine 2 was released in early September.

The stock roughly doubled from the lows in May to the release date of Space Marine 2, with most of that run-up happening in August and early September. Despite being a huge success, the stock roughly remained flat after that. It even gave some opportunities, despite a very decent earnings release.

Conversely, this is Frontier Development (FDEV) chart over the last few months.

Planet Coaster 2, their most expected game, was released on November 6th. In the month or so before release, the price ran up quite a bit, only to fall back to earth fairly quickly on a release that was... not great.

Now, both situations were far from equal, but they had something in common. The releases were key for both companies, with the potential to improve their finances in a great way. What happened in both cases was also similar: the stock ran up to the expected value in case the release was successful.

In the case of Frontier, then the stock reacted to a botched release (justifiably). In the case of Pullup, arguably the stock underreacted to the success of the release, even if it was wildly successful1.

Is it possible that overreacting to an important release is a feature of how videogame companies trade? Or, rather than overreacting, a big part of the upside gets priced in before release, and then getting returns after release is really hard.

The evidence

To see if that makes sense, I compiled some information for releases that were very relevant to their respective companies. There is some judgement involved (What is a failed release? What were the expectations?). And I also added another column to mark it as a clear case or not. In this case, a clear case is a game that was relevant for the company economically in a way that success could return a large percentage of the market cap in profits, or change the path of profits for the company. I included several unclear cases because highly hyped games can move large stocks even if their success is less determinant. The results are, as expected, mixed, at least when taken naively.

First, the idea of applying that intuition in a quantitative way goes out of the window really fast. Out of the 17 cases, only 10 have a positive return in the month prior. Among the “clear cases", 6 out of 11 have negative returns, and the 3-month picture is even worse.

But let's go through the “clear" cases one by one.

Cities Skylines 2 released after a weird year for Paradox. Until August, the stock climbed 46% based on expectations of new releases, the successful release of AoW4, and well received DLCs for the main games. A promising H1 report was released at the end of July, propelling the stock further. Then it became apparent that the new releases, mainly The Lamplighters League, were not gathering traction, and the release bombed in September, causing a relevant write-down. It was hard to propel the stock further. And then, the failure of the release took a long time to be digested (stock was falling for many months). But that is probably due to hopes of salvaging the game with additional content and patches, which wouldn't be a first for the publisher. Lesson to take here: wider context matters.

Elden Ring and its DLC were key for Kadokawa (and less key for Bandai Namco, but also relevant), and FromSoftware's Dark Souls series was well known already, and it was announced in 2019, and the release date was announced in June 2021. From June 2019 to the release date, Kadokawa had a 290% return. Part of it was a good run of results, but let's not forget Kadokawa was trading at around 40 times earnings at the time. My personal impression is that the expectation for the release was baked in well before. A similar thing is happening with Take-Two since January '23. Despite results being not great, everybody is just waiting for GTA62, and the stock has gone up about 80%. Lesson to take here: For really, really big releases, as in worldwide events, the run can take longer and finish earlier.

Cyberpunk 2077 is a similar case, with the stock peaking a few months before release (and with a spike in price just before it happened). At that peak CD Projekt was trading at about $10B, or about 200 times their Witcher 3-derived earnings at the time, running almost 200% since the 2018 E3 trailer.

Frostpunk 2 is another case that can happen: Delays. It was scheduled to be released by the end of July, but then at the end of June it was pushed back 2 months. Until the announcement of the delay, the stock was doing well (10% one-month return, 22% three-months return), then it went more or less flat until the release itself (which was not terrible, just not as good as expectations were). Silent Hill 2 is a mix also of delays and the price of Bloober reflecting expectations from the date it was announced onwards, rather than just before release.

House Flipper 2 is… just a weird case. There was relative hype for the game, and it would have been good for PlayWay. But the prior quarter had been relatively bad for the company and it was pushing down the price. It was also expected to contribute more over time than in a big bump.

Why did it work for Dragon's Dogma 2 and Granblue Fantasy despite them not being so relevant for them? In the case of Dragon's Dogma, I think it was a big game that was not taken into account that much before getting close to release. In the case of Granblue, I think it was just confounders, as it matched with CyberAgent media division going better.

My general conclusion is this can work but:

• Check carefully if is already reflected in the price. If expectations are already up there, even if there are a few months pending for release, it is dangerous to get long at that point. Better wait until the release. Really succesful releases take their time to be baked in the price, I think (and we have examples like Phantom Liberty to prove it!)

• If a really hypeable game is announced, it can be feeding the price for years (TTWO, CD Projekt, Kadokawa to a lesser extent).

• Bad releases are penalised fairly quickly in most cases, and returns after a good release are not necessarily that good. 8 out of 11 clear cases went down after a release. Don't think this can be used to systematically short on release, but maintaining a videogame company up until the release date of a flagship game can be dangerous!

Some potential cases now

Capcom has a shot at having a decent case going on right now. Monster Hunter Wilds is selling really well so far, and it doesn't release until late February. Personally, I am not here because I think it is mostly baked-in already, and also as big as it can get, Monster Hunter Wilds would have to be a Elden-Ring level success to really be huge for Capcom (which trades at about $11.5B right now). It could be (Monster Hunter Rise was pretty close), but I don't see the risk/reward skewed enough.

Nintendo is another, until the Switch 2 announcement is out. And I think it is a big reason for its performance this year. Here, the potential of a blue sky scenario is not fully baked in, because the potential is Nintendo dominating almost as much as in Japan in RoW. Personally I am not that sure about that scenario, and I don't have a position (I like other stuff better), but I would be careful about the reception of the announcement, at the level it trades.

Nihon Falcom is interesting in this regard, but the release is in autumn 25 (I am talking about the global release of the remake of their most popular game to date, and with GungHo as a publisher). Personally, I think this one can be transformational for the company and is not reflected in the price, and I do have a position, but a long time left.

Krafton, the company behind PUBG, is releasing Inzoi, a Sims competitor in February, and it has a decent following. It is not a PUBG level release, of course. The company trades at about $10B, and adding a successful release on that area to their portfolio could bring a decent amount of value, as it is very recurrent thanks to content packs. And it is not particularly expensive either. I have no position, as it is difficult to own South Korean companies without ADRs, but if anyone knows of a broker available in Europe that offers them, open to suggestions!

Embracer is releasing Kingdom Come: Deliverance II in February. The original one sold 8 million copies (as of this year, but frontloaded, as usual). It has a decent following and promotional content is starting to pick-up. It is not the main reason (spin-offs incoming and the easybrain sale are more important), but I don't think it is fully priced-in.

CD Projekt Red after the Witcher 4 trailer is a good candidate. They have a solid revenue base with Cyberpunk, and Witcher 4 has a lot of expectation. Personally, I think it is already valued for growth so I wouldn't make it a full position. But I am tempted to take a small one based on this framework alone.

And there is another case of a small cap with not one, but two upcoming releases that can affect it in a big way. But that is one I want to explain in more detail, so you will have to wait for one week!

The year in general

In general, it has been a fairly eventful year. Things at work were interesting, and they might get even more so. I think I mentioned it at some point, but my day job is being an engineering manager at a European tech company. Not the best job market I've seen. Also not the worst1. Might get worse with all the AI stuff2, we'll see! Family-wise, I became a dad, and I'm still over the moon about it. It has been a bit challenging at times (things can get a bit rough if there are problems with food and weight, as many of you probably know), but all is good now, and we are extremely happy to have her here!

Investment-wise, it has also been a good year3. My best so far, actually4. And writing here has been a big part of that, because I have connected or reconnected5 with a bunch of other investment junkies and that means we exchange ideas fairly often. Not that I always go for the correct ones (someone pitched Build-a-Bear back in May and I didn't listen, for example), but it helps to have people bringing ideas, especially in other areas, be it Argentinian equities, Polish renewables companies or UK industrials (seriously, you know how to make the value investor in me happy6). Thank you all, you know who you are (and feel free to identify yourselves, don't want to out anyone).

Process-wise, I've made some unforced errors, mostly related to playing with options and a couple episodes of FOMO. Thankfully, while it seems I have not learned those lessons as well as I had thought, I have learned to do it with smaller amounts and they haven't affected returns that much… but it should have not been a factor. I have also started to short more often. Not the best year to do it, but the contribution result was positive, even without taking into account the additional return of the long side of those bets7. We are talking about funding shorts, tiny positions each, no heroics. Still, have been burnt a couple of times (RGTI takes the cake, although I closed early… should have flipped long, but never had the stomach for the meme stuff).

The investments

Over time, I have talked about 22 stocks in relative depth and with a clear conclusion, and then we have a couple of weird situations. In the table, you have the ones that I could classify more clearly and you can see the returns timed from the time I added the info in the blog to now or the time when I communicated I had closed the position (in one case I communicated it in X/BlueSky though). The returns are in local currency8. I won't go through the ones where I took a no-investment decision and that is still the case… but it is worth noting that out of 10 no investment decisions, only 2 had a positive return. And one of them (CD Projekt) is a company where the only thing I don't like is the price.

Odds & ends

We have Embracer, which I have left out because I have discussed it several times, first with a no-investment perspective (May 7th) then with a more positive one due to Eazybrain's sale (much as I don't like Asmodee's strategy that much) on November 26th, and truth be told I had (and still have) a small position since. But despite having a position the most positive thing I said was “I think that Eazybrain's sale was at a fantastic price and I am less queasy about the value of the whole group after it". I dislike how management has manipulated communication over time, and I let that get in the way of my communication, and for that, I apologize. Just so everyone knows, I have a small position now, and I think that is the first sale that is actually beneficial for the company. I still don't trust the management much. Between May 7th and November 26th the stock was roughly flat, and since then it has moved up about 4%, so nothing meaningful one way or another.

There was also another case that I didn't know how to classify. Back in January 25th I pitched shorting Toei Animation and going long Toei Company, a trade that I could not implement as the brokers I have don't allow shorting Toei Animation (but they do allow shorting Toei Company!). As I mentioned on November 5th that valuation gap disappeared, so if you were able to implement that trade, congratulations! Toei Co had a total return of 23% between those dates, while Toei Animation had a roughly 0% return. The thing is, since then, Toei Animation has remained at the same level, while Toei Co has gone up a further 20%, with Toei Co now valued at about 50% of Toei Animation's market cap (remember they have 40%), despite Toei Co's main business not going great. If it keeps extending, maybe we can go the opposite way!

Ok, into the regular stuff.

Full positions

PlayWay

This one is a curious situation. The fundamentals have improved, and yet I have lost money. 2023 was a record year in terms of revenue and but not in terms of profit (due largely to the late release of House Flipper 2 and the particularly conservative accounting they use for development costs). 2024 is a record year (as of Q3) in revenue (+15% vs 2023), operating profit (+20% vs 2023) and profit attributable to shareholders (+45%, although this is in part thanks to the sale of Big Cheese), and I think Q4 will confirm it as a record year in all magnitudes. However, the multiple has contracted to about 12x PE and about 8% dividend yield for a growing company with net cash and 25%+ ROE. I, of course, remain long. I wrote an update after H1

Games Workshop

Games Workshop has inflected in growth and royalties are becoming more significant, thanks to Space Marine 2. With that out and the Amazon deal in the bag, probably more deals (and more royalties) will follow. And there is some cross-over from games and series to the main hobby. +25% return since the main article, more since this update. I remain long as well!

Sega Sammy

I am particularly proud of the initial Sega Sammy article. I mentioned the potential divestment in the resorts, the focus they were putting in slot machines to complement pachinko/pachislot, the potential recovery for CA and the good growth of Sports Interactive and the bad fit of Relic and Amplitude in the group, how the Japanese studios were in a good track and how important 2024 was for the Sonic IP.

One year later, they have divested Paradise, the segments in Sammy have been re-expressed to highlight slot machines (gaming sub segment), CA has recovered through 2 good DLCs for TW:W3 and a huge update to TW:Pharaoh, Relic and Amplitude are no longer in the group, RGG9 and Atlus just had their best year yet (with Metaphor winning 3 awards at The Game Awards and nominated for GotY) and Sonic 3 seems on track for a franchise-record box office. I missed on Sports Interactive (FM25 was delayed until March), guess you can't get everything right!

Sega Sammy has returned 52% in JPY (below 40% in USD though), and I think it is still fairly cheap, given the more than decent results in Q2 and given that games sales in Q3 are looking really decent. Will write an update after Q3 is out, but I remain long.

IG Port

I closed my position in IG Port about a month ago, which might sound strange given that my last update here, in October, was fairly positive. What happened was… well, that the stock went up 53% in a month!

I still think in the long term IG Port will be a good investment, but the price has run a bit more than the fundamentals, and there is execution risk (the profitability of the animation segment is a bit too negative for my liking), so right now I prefer to have that money elsewhere. That said, IG Port has been pretty volatile the last few years, and I will give it another go if it goes below 2000 yen or so.

In any case, not going to complain after a +80% in a year10.

Mandarake

I closed my position in Mandarake in October, after validating that the slight slump in sales was not a matter of a rogue month and had come with a reduction in operating leverage as well. This one was a full blown mistake, not a case of the multiple contracting more than could be expected. I continue monitoring it, especially as I see some things that can be interesting (the mercari store, for example). But they haven't been able to capitalize on the tourism boom and the merchandise craze to the extent that I expected, so I closed at a 27% loss.

Nihon Falcom

What is Falcom doing here, if I pitched it as a small position back in the day? Well, recent developments make me think it is a far better proposition than it was, and I have increased my personal position, despite the results being just OK.

Will publish an update as soon as I can, but I have a bigger position here now. Not close to the biggest ones I have (Cover, Games Workshop, PlayWay) because it is fairly illiquid, but this is no longer a tracker or a 1% position for me. The short version is that the release schedule and the change in publishers is exciting, with simultaneous global releases in the works for autumn 2025, something Falcom has never had before.

Furyu Corporation

Furyu is still a good investment, but their photobooth business decline has accelerated. While their collectibles business is still going well (although profitability was slightly lower in H1), and Laid back camp is the gift that keeps on giving, the decline of that business at a higher pace than expected damages the thesis, as it is still the biggest profit pool (and was supposed to be for a while), and now I only have a small position and would not make it a core one. The return so far has been positive, but only 6%.

I think this should still work, especially if they use the cash they have (about 40% of the market cap) for something.

Continuous Compounding

Furyu Corporation (TSE 6238): Free Lottery Tickets Feat. Dungeon Investing!

*Legal Disclaimer: This post and all its contents are for informational or educational purposes only. Continuous Compounding assumes no responsibility or liability for any errors, inaccuracies, or omissions in this post, links, attachments, or any actions taken based on its contents. The information sources used are believed to be reliable, but accuracy…

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2 years ago · 14 likes · Continuous Compounding - Alan and Dungeon Investing

Cover Corp

Cover Corp started to run immediately after I published this write-up, as they published a positive update the same day, with profits soaring, as well as revenue. Despite the 70% run, I don't think this is over, despite the rich multiple. After all, they have just turned-on the merchandising machine, and the last quarter saw an impressive 80% YoY profit increase (although the prior one had been disappointing, now that the merchandise distribution is ongoing, it should support better numbers overall).

Summary

Out of the 7 stocks I pitched as full positions (not counting Falcom, which I originally pitched as a small one), 5 had positive returns. Of the two with negative returns, I closed one at a 27% loss, and the other remains, I think, an attractive investment. Of the positive ones, I only closed IG Port so far, at an 80% gain. A naive average between all the main position pitches gives us a 27% return (and much higher CAGR, as most of them have not been on for a full year yet).

It is alright, but given how the indexes have behaved, it is also not unbelievably good.

Small positions

These are positions that are added either as trackers or expecting a right tail outcome, but with more uncertainty.

Gravity

Not much has changed here. Still has a giant pile of cash that won't be used until GungHo says so. Still gaining relevance in earnings vs. GungHo core business. But GungHo now has activists running a campaign as shareholders, and using and/or fully appropriating Gravity's hoard should be part of any optimization program, and something should go to minorities (probably as a take under), so I think a small position is still warranted. Still, -11.5% since first publishing.

Square Enix

Just too soon to tell! I just published the last entry of this trilogy a couple of days ago. Regardless, why did I spend so much time investigating and writing about a business that doesn't qualify for a full-blown position?

Well, because Square Enix reminds me a bit of Sega, with underearning IP, they just went through a change in leadership and the new strategic plan says many of the correct things. If things are alright, it can graduate to one of the biggest positions in the portfolio. But I am still watching the initial steps of the implementation.

Creepy Jar

Creepy Jar has graduated to a small position, as it has a decent potential game and still earns decently thanks to Green Hell. Still, further delays in StarRupture would greatly damage the thesis here (and I would probably close if I don't see a good stream of material pointing to a release).

Small position summary

Out of the three small positions I have talked about here, it is too early for Square Enix, Falcom moved 5.5% up and Gravity 11% down. Creepy Jar also moved down after mentioning it, but was only here as a follow up. . The big ones did better for sure!

I have not talked about some other related positions here (Pullup, although I mentioned it in Twitter/X), but if we try to measure the value this blog brings, well, it is what it is!

Follow-up

NIS

The argument for NIS (same article as Falcom) was that better releases of the Trails franchise should improve their results… and they seem to have lost their relationship with Falcom for the most part. Not surprising, their work in the releases was lackluster. Their results have also taken a nosedive, as their release schedule has been fairly weak, other than Falcom games. Complete pass for me nowadays.

The blog

When I started Dungeon Investing11, I had been inactive in the investment community for about two years, so I didn't start with much of a platform and I was mostly writing for myself. It took 5 months to reach 100 subscribers here, now we are 808!

Granted, the reason it took so long (partly) was that I had two relatively long periods of not publishing anything (from September to November 2023, and this summer). Those periods also show pretty clearly in views!

As you can see, the best month so far was November, with slightly more than 6k total views, with December a close second (will finish between 5 and 6k). Still not widely read, but a decent increase! Thank you all for reading (and especially for the discussions on different stocks!).

The open rate oscillates between 40 and 50% depending on the edition (30-day open rate sits at 45%), which is not particularly high. I suspect that is because I have been catering to different audiences:

• Investors interested in videogame companies, coming here for the posts on Sega, Embracer or PlayWay.

• Investors interested in Japanese companies, coming here for the post on Mandarake, IG Port, Cover Corp, Toei or Square Enix12, or the article on how to research Japanese companies.

• Games Workshop's shareholders. Been writing about the company since 2018 and I have talked about it in other places (like this podcast with Graham Rhodes, or my former blog). GAW has a relevant following, as noticeable when I publish something about it - the 2nd article I published, which was about the company, is the 11th most read in the substack despite the subscriber count back then being about 20 people

• People (not necessarily investors) interested in videogame companies, rather than in investing as such and landing here thanks to a couple of mentions in or through ’ recommendation (thank you both!).

There is, of course, overlap between all groups, but since I focus a lot in the state of a company rather than in stock pitches (after all, I write articles at times with a negative conclusion), this substack is both a lot narrower in focus (sector) and a lot wider in potential audience than other investment ones. This might need some rethinking going forward. I like exploring companies in the nich entertainment, even if they are not necessarily a top-notch investment when explored… but I am also a huge fan of more to-the-point pitches (like the ones makes, for example).

Where do you come from?

How do people find Dungeon Investing? Well, the main sources are readers sharing, of course. So please, keep doing it! It really encourages me to keep writing, because the way to get more information both on the stocks I pitch and others is to have other interested stock pickers reading it!

In terms of sharing the content, I have to thank , (especially in this case, because his content is a bir removed from stock analysis, although really recommended for anyone looking at videogame stocks) and for relevant boosts. Mentions in stock analysis aggregation newsletters, mainly and have also helped quite a bit!

The recommendations from (again, not related with stocks, so I appreciate it even more!), , , , , and have brought more than a third of you here. Thank you all! It is a very useful mechanism to help new publications here to grow.

The podcast I did with Graham on Games Workshop has also proven to drive a bunch of you here, but other collaborations (in Spanish in Hablemos de Inversiones, and the collaboration with Continuous Compounding on Furyu) failed to have a similar effect. My conclusion is that this kind of stuff is pretty hit and miss, unless it is an extremely popular podcast/blog. Still, it is really fun to do, so if anyone is interested in discussing any gaming/anime stock, hit me up!

Another source is, of course, Twitter/X. And I say that and not social networks because in terms of generating traffic and subscriptions, is the only one that has worked up to a point. Granted, it is the only one where I have some following and a real network. I like BlueSky more, but most of the interesting people I follow has not migrated there, and the conversation remains more lively in X in stock analysis, at least for me. If you are in BlueSky though and want to discuss things there, happy to talk! But social networks are much tougher ways to get your content out there nowadays unless you enter in the engagement bait game which is not something I am particualrly good at.

Substack notes and engine recommendations also seem to drive some people, but it is difficult to judge. Also, the only notes that seem to have reach are the ones referencing how many subscribers you have.

The most popular articles

Out of the 36 posts I have published so far, the 5 best-performing articles since inception have been:

Revisiting Games Workshop is always interesting, and not only for me, it seems. In this case, it was revisiting the company after the release of Space Marine 2, seeing the consequences it had. Progress since has been really good, with the Amazon deal signed already and miniatures sales going up significantly.

Japanese stocks have been popular this year, and having some tools on hand for them has also become popular!

The first part of my latest deep-dive has benefited from a larger subscriber base, and I think there is also a fair amount of interest in the company

Reviewing what is known about the future spin-off from Embracer. I am a fan of what was built before joining Embracer, but I also think the market is not as interesting for M&A as it was before, so the plans of resuming M&A management has have left me a bit cold

This article on Sega Sammy is still one of the most popular ones, and also the one that drove more people to subscribe to the blog. I think it is a good article, but to be fair, also benefitted from being featured in the now paused and I Thanks and , that helped a lot!

Not sure I see a pattern here, as there we have tooling, deep dives and updates. One interesting thing is that the two best performing pitches I have made (on IG Port and Cover Corp) were not particularly popular. That said, tooling and single-stock articles are far more popular than result update medleys or similar stuff. I think when there are things like that it makes more sense to add them as a coda (as I did in the Asmodee post) rather than a post with only short excerpts, and will probably try to keep to that approach.

Going into 2025

I still have a few things! An anime investing primer and Paradox Interactive are still pending, and even before that I have another two of posts pending for the next couple of weeks (let those be a surprise!), and an update on Nihon Falcom.

My goal this year is to have something up weekly, so almost twice the 29 posts I published in 2024 (counting this one!), between new stocks and continued coverage of the ones we have already mentioned… and anything else that pops-up, really.

Don't miss it ;)

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Here, we will look at their strategy, and especially at their newest strategic plan announced a few months ago, their capital allocation, and finally their valuation. But first let's get to know the current captain of the ship.

Kiryu's new reign

After Wada's lackluster reign (with a total return of -40% over 10 years after the merger even after considering dividends), Yosuke Matsuda took over in 2013. Matsuda focused the company mostly on RPGs, gave the needed space and resources to refocus FFXIV1 after a terrible release and divested the western portfolio (mostly to Embracer2), and also saw the publishing, merch, and arcade divisions grow in the last few years (leaving almost a 6x total return to shareholders). He also started the much-debated investments in blockchain games. But all those returns were achieved before 2021, and we have already seen the pain in that period in the games division. In June 2023, he stepped aside and left his position to Takashi Kiryu3 in what has been explained as a planned succession... but it also came after a run of bad results.

So who is Kiryu and what does he bring? As for who he is, he has been at Square Enix for only a few years (since 2020, to be precise), and he started as the Chief Strategy Officer. Before that, he had been working for 7 years (including an MBA leave for one) at Dentsu, the publicity giant. In the last year, he was running the Dentsu Innovation Initiative4. Before that… I haven't found much, and he was born in 1975, so I guess he did something before 2013. I just haven't found that information! He is, reportedly, an avid gamer and long-time fan of Dragon Quest and Final Fantasy, but as far as I know that only came out after he became the CEO5.

His public comms so far, aside from the ones in conference calls, have been trying to emphasize his love for the games, and he has not talked much about Web3 or blockchain, which has led gamers to have a relatively positive view on him6. He does, however, talk a lot about the internal use of generative AI for efficiency, so we might be just seeing him using the buzzword of the day.

All this to say that I don't have a particularly strong view of Kiryu himself. I am primed to have a relatively negative opinion here, because he joined the company in 2020 as CSO, and the strategic decisions since have been lackluster (in the gaming sector, at least!), including:

• Releasing two main FF almost back to back and with little marketing for the second.

• Not moving or canceling some releases to avoid cannibalization.

• All the crypto/blockchain things (which I have not discussed much because they didn't seem to be a significant part of the use of funds or, of course, revenue, but were very prominent in earnings calls and similar)

Then again, they have also doubled down on Taito, the publishing segment, and the merchandising segment, so not all is bad. Let's check on the plans he has in mind!

2025-27 Strategic plan

The new strategic plan is focused on games, as is normal for Square Enix, and does not set a lot of hard objectives. It focuses on operating margin, targeting 15% consolidated operating margin, without targeting revenue or profit or cash volumes. The objective itself is a bit underwhelming, as Square Enix has hit it 4 out of the 5 last years, with 2024 being the only one which didn't, at 10% and with significant sandbagging (the content account write-downs mentioned in part 2). Aside from that, they target a 10% ROE which, you guessed it, was complied with 4 out of the 5 last years, with 2024 being the only exception. So no absolute numerical targets, only ratios that have been hit regularly. Not a great start, but let's look at the actions they want to take.

• Shift toward multiplatform: They were already doing this slowly, but I really want to see FF main releases going to PC/Xbox/Nintendo at the same time as to PS. Nintendo is the one that I'm doubtful about for the most graphically intense games (FF), as it will depend on the capabilities of the new console. Dragon Quest III remake was already released this way and is selling really well despite being a HD-2D remake.

• Less games, better quality: My personal opinion is that in this market 2 types of companies can go well. Hyper cost-conscious (PlayWay, Falcom) or really focused companies with not many releases. The era of flooding the market with AA games has passed, I think. So it is good to see them focusing and avoiding cannibalization.

• Focus on in-house development: Square Enix's biggest hits have been internally developed games, and their published games’ game has been lackluster to say the least with even relative successes (Outriders) being eventually failures because of the cost.

• Look for cross-media opportunities / better IP monetization: At this point, I think you can make a drinking game out of this. No particular plans were mentioned, though (although there is a NieR animation airing). What it means in this case is, I suspect, to increase licenses of DQ/NieR/FF and monetise merch better. Again, something they were already doing well.

Overall, all are good ideas but nothing surprising. They address most of the issues that I mentioned in the prior entry, and that should at least avoid the money loss. There is more in the plan, about reviewing organizational structures (that is, optimizing costs, and in development's case, not making the different areas silos anymore) and bringing the London mobile studio closer to Japan's development, but more housekeeping than anything else. And then one element that would worry me in other circumstances.

If this reads to you like “We are going to buy a new office", you are not alone. But the thing is this move was already announced in March 2023, almost at the same time as Kiryu taking the reins. Guess we can add “new expensive offices" to the list of sins since 2020, but the thing is that the investment was already well in progress when the strategic plan was announced.

Overall my impression of the 2025-27 plan is… positive, actually. There is nothing too outlandish, or incredibly brilliant. No crypto, no we will become an AI powerhouse. It is hey, let's focus on core competencies and spend a bit less cutting on everything else, and move all our games to pure multiplatform, it is working well for everyone else! There are also no outlandish promises for MMO and SD, where they know they are in decline for now, other than keeping at it7.

What do I miss here then? Any sign of ambition whatsoever. All targets are below some of the recent years, to the extent there is any. There is some mention about cost-cutting, but not about the areas or how much. It is true that it is framed as three years to reposition the company and grow from there, as a transition period. If I had to use a word to describe it, it would be mid.

I also miss plans to bring DQ to the West in earnest. But well, guess that is difficult to put there!

Capital allocation: track record and plans

Capital allocation is also mentioned in the strategic plan, but let's discuss first their prior track record and how what is discussed in the plan changes things. Their past track record is not great, but also not particularly terrible. No relevant M&A in the last few years. Instead, they have returned 50B yen as dividends over the last 5 years, have accumulated a further 105B yen in cash and investments, and have invested a few billion more in the business. Their plans going forward seem a bit different.

They have an ongoing share repurchase program for 20B that they have to use before May and that is, as of November, untouched. Also, they are planning to use part of the current balance sheet cash for both return to shareholders and M&A if some good target appears. With 220B in net cash and another 20B or so in investments and deposits, reducing that haul by 70B yen over three years is not that impressive, but it is a start. The three-year OpCF prediction of 60B is probably lowballed (they did 92B in the last three years and have surpassed the target in every rolling three-year period since 2016-2018 at the very least), so if they hold themselves to the policy and not to the total number given, they should be returning more or executing more M&A.

As with the strategic plan, better than what was already in place, although nothing truly spectacular. I would love to see them using a bigger part of the cash pile, at the very least.

Valuation

After discussing so much about the business, I guess it is time to put a number on it. And in this case, it is hard.

The other business area is very easy, as they are consistent growers with relatively easy-to-understand drivers. I think publishing might stall a bit, but I think the merchandise (which includes both anime and videogame licensing!) and arcade areas will continue growing at least in the next few years, and I think the 300B tag makes sense (sure, it is for about 20B in operating profit8, which might sound a bit rich, but it is growing fast. 2x from FY21 to FY24, and the operating profit is growing 22% YoY in H1.

Then there is the cash, at around 240B (counting investments).

And then the videogame segment… it is really difficult to value. Using a blended approach based on operating profit makes less sense, as the cash conversion of this segment is worse when investment is ramping up, and also a lot lumpier thanks to the HD segment. SD and MMO are easier and should convert fairly well, but even then they have very different dynamics. SD is seeing a steep decline, as Dragon Quest Walk faltered quite a bit in the last few months. MMO should see a less steep decline and recovery in three-year cycles. HD is anyone's guess, as it depends a lot on the year's releases… but one or two decent multiplatform releases and back-catalog should be enough to make the numbers work. The central scenario I use looks like this.

Now, there are two strong assumptions here:

• MMO and SD don't recover from their current downward trend, which I think is most likely (although MMO should see a bump in 2028 in this scenario with a new expansion released). MMO profitability is lower than before, in line with what we have seen in H1, but that should be content expense amortization for the expansion packs (hence why the margin goes up in subsequent years, although not to current levels)

• HD does recover profitability and keeps a similar level of sales, once you account for inflation. I think with fewer titles the return to profitability is not in question (back-catalog does a lot here!). Seeing a similar level of sales in 2027 to the one in 2024 is a bit more iffy, with fewer titles. But multiplatform and good promo can do wonders (after all, we are seeing Dragon Quest III's remake sell close to FFVII: Rebirth, if not more).

But I think the first assumption can be challenged. First, Square Enix will probably try to go back to 2-year release schedules for MMO expansions. Second, there are many mobile titles in development and one of them is a FFXIV adaptation (although reportedly without compatibility with the current FFXIV). So I think the scenario above can be taken as a base case with little downside and potential upside.

Would I pay 200B for that base case? Sure. And there is great optionality. Say MMO goes back to a 2-year release cycle making FFXIV/DQX go back to growth, and SD recovers thanks to the FFXIV adaptation, and the next FF goes back to 10+ million copies (which is easier with full multiplatform). Suddenly you are looking at 40B+ operating profit in the segment. Would I pay a lot for that option? Well, I try not to pay that much for optionality, but at the current price (740B yen market cap) you are getting a fairly valued business (if you add up cash, other business and games) plus the optionality of the games segment doing well. Not only that, but I think HD profitability will improve beyond a 10% operating margin, as it is still a fairly depressed one.

Conclusion

Square Enix has a problematic gaming segment with tons of good IP, and fantastic segments elsewhere. I think currently it is slightly undervalued (I have assigned no value to the optionality in the analysis above), but not a super clear bargain. I own a small position, build during the summer (when the valuation was more compelling). If they show signs to walk the walk and actually improve the videogame business, it will be a fantastic investment over time, otherwise it will be only middling.

In many ways this situation reminds me of Sega Sammy, with other business units that support the valuation and a videogames unit that is less than ideal… but Sega was already working on fixing the segment problems in 2023 and with Atlus and RGG doing really good work, as well as doing well in cross-media. It was also cheaper and more profitable, thanks to Sammy. Square Enix seems to be starting down that path, and arguably has better IP to build upon and its other business are of higher quality. But a cheaper valuation or more signs of improvement are needed to make it more compelling at this point.

There is an additional point that also applies to Sega, and it is the value of their existing IP. This might sound silly, but I think AI is going to make content creation a lot cheaper, and that is going to make existing well-known IP far more valuable. After all, content being too abundant makes discoverability worse. Which, for me, is an additional reason to keep track of Square Enix, and even have a small allocation there.

But Square Enix's best-known IP is, without any doubt, Final Fantasy. But while it occupies a privileged spot in many gamer's minds, it is not a single IP, and far from the only valuable one in Square Enix's portfolio.

In this part, we will review first the financial situation of the videogame division and its profitability, the evolution in the last few years and their upcoming games, and not only that, but the core IPs in their library. But first, let's start with understanding the three different business models that hide under this segment.

The business models: HD, SD, MMO

While the IPs are shared between all modes, we have three very distinct ways to make money here:

• HD games, or, as we old people like to call them, games. You buy a copy and then play or replay as much as you want, but other than some very particular scenarios, online play is relatively limited. This is the most problematic segment and has had losses at least for the last 2 years, likely longer (but Square Enix didn't disclose subsegments back then). Despite the titles making 500-600 $ million per year in aggregate, they still can't recover costs. At the same time, it is the source of the IP the other branches use, so you could be tempted to consider it an investment. This segment includes all consoles and PC, including portable consoles like the Switch.

• MMO: PC/Console online multiplayer games. In the case of Square Enix, shared universes with seasonal events and large updates from time to time. They make about half the revenue of the segment above1, but their margin is 40-60%, depending on the year and what has been released. They make money through content packs, in-game purchases, subscriptions to servers, and cosmetics. They have 2 main games, Final Fantasy XIV and Dragon Quest X, although FFXI is technically still open, but without new big updates being released. FFXIV gets big updates on a biannual basis, more or less, while DQX gets more frequent but smaller updates. Both have going on for very long (since 20132 for FFXIV, and 2012 for DQX), but so far aged gracefully. So far, no attempts to add to the roster have been really successful3. The good part about MMOs is the much higher LTV of a user, and if they have critical mass they are incredibly profitable because the churn among heavy users is very low (as it becomes a very important part of the user's life). Hence the good margins.

• SD (Smart Device) games, or mobile. There is a host of games here based on Dragon Quest, Final Fantasy, and other properties (Octopath, SaGa). The segment as a whole is the biggest in terms of revenue and has around 14% margins. The biggest contributors to revenue are Dragon Quest Walk (2019) and Dragon Quest TACT (2020) (both only in Japan) and FFVII Ever Crisis (2023), but there are many more relatively relevant ones. Despite Ever Crisis’ contribution, the trend is downwards in the last few years. In SD, we are dealing with service games of a sort, but in general with lower loyalty and higher costs (especially the cost of getting more users to replace the ones that leave). In Square Enix's case, we have to add the royalties the actual developers (and in some cases operators) of the games get. Because Square Enix doesn't develop their mobile games on their own.

The financials and current situation

Now that we have looked into what the business model is, let's look at the financials. First, we have the PNL, and what it looks like is, like many game makers, there was a COVID boost and then a bit of a hangover.

Except in this case, the hangover seems impressive, with profit levels below 2019 despite revenue being up 20%. Not only that but the corporate structure also scaled a lot, and I think it was due to the bigger games structure, given the timing, so you have to add a further 7B in expenses to that tally.

We do have the data per line to have a more detailed analysis (although weirdly enough, the subsegment breakdown was not done for operating profit for 2021 and 2022)

As you can see, HD revenue has always been wildly noisy, and SD and MMO revenues are still above pre-pandemic levels, and the same is true for their operating profit. In H1 FY25, SD looks weak despite Ever Crisis doing decently as the portfolio ages. However, Dawntrail revitalized MMO, which is doing even better than in 2022. HD is, of course, still losing money, although very little (and I think it won't lose money this full FY).

HD is, however, a painful story. While the 2020 losses due to lack of releases are understandable, FY23 and FY24 were supposed to be much, much stronger than they were.

The lineup for FY23 was a bit weaker (Octopath Traveler II, and FFVII Crisis Core were in the lineup along with new properties like Valkyrie Elysium and Forspoken), but FY24 was supposed to be mindblowing, with both FFXVI and FFVII: Rebirth, along with Foamstars. Of the 7 titles mentioned, I think 4 are almost unequivocal flops (Valkyrie Elysium, Forspoken, Foamstars, and Rebirth4).

Not only that, but as we saw in the previous article, Square Enix has really good cash conversion in their other businesses. In videogames, though, it is a bit different. Though everything flows through the PNL eventually, games require significant investment that in Square Enix's case is booked in the content production account, so the results have to be adjusted based on that variation as well

What we can see here is that in 2020, 2021 and 2022 cash conversion was a bit worse than the results imply, while in 2023 and 2024 it was a lot better, all else equal5. The trend of reducing ongoing investment has changed in H1'25 with a 3.6B increase. But still, something much more moderate than the increases in 2020-2022.

Square Enix's game development issues

While one of Square Enix's issues is the decrease of profits in the SD area, that was always a bit of a sideshow for them, as you can check by who is developing their games. All their successful mobile games have other studios involved. DQ Walk? - Colopl6. DQ Tact? Aiming7. FFVII Ever Crisis? CyberAgent. That's part of the reason why the margins are so low in this segment. Maybe they should acquire core competencies in the area, but they don't really have them as of now. I will discuss their strategy (or lack thereof) later, but you can't always count on something with DQ Walk's level of success.

HD is a different area. It should be a core competency of Square Enix, and they do develop major titles. But how are they unable to generate profit when they are getting $500-600 million in revenue per year? Reverting that and getting it to be profitable is key for Square Enix. Let's review what has been happening.

Repeated failures outside their core expertise

Foamstars, Babylon's Fall, Forspoken, Outriders… all of those failures share similar characteristics. First, almost all (except Forspoken) were developed externally. Second, all of them are outside Square Enix core area (JRPG + Japan-aesthetics action RPG8). Third, they all had pretty large budgets, and failed to be profitable.

If you want to expand to a new area, I think you need to do it either with an internal team or with a limited budget. Preferably both, because you need to build internal muscle in a new genre, especially if your entire machine is specialised in a relatively niche genre. And the jump to a AAA game in a new genre might still very well fail!

Cannibalization

Maybe you think I am going to talk about getting FFXVI and FFVII: Rebirth in the same fiscal year and sure, I am sure there was some cannibalization there, or at least some exhaustion when Rebirth's marketing hit. But at least FF main games appeal outside the core JRPG fanbase. The same could be said about Dragon Quest games in Japan, they have their own fanbase and don't compete in the same realm.

But the same is not true for most of their games. If you release Valkyrie elysium, The Diofield chronicle, Triangle strategy, Star ocean 6, Tactics ogre reborn, Stranger of paradise, Voice of cards, Various daylife, Chrono Cross: The radical dreamers edition and Harvestella in a single calendar year, they are going to affect each other a lot. This happened in FY22, FY23 and, to a lesser extent, FY24.

A big part of that was caused by COVID which not only created a new content arms race in gaming but also delayed a lot of projects… that then got released in bulk in calendar years '21, '22 , and '23. Square Enix was, I think, a clear victim of that, with about 4 relevant titles in calendar year 2020, 15 in 2021, 18 in 2022, and 11 in 2023. 2024 is back to a more normal schedule, with 89.

PlayStation focus

In this day and age, running their mainline Final Fantasy games as PlayStation temporary exclusives is counterproductive. I am sure when they first made the decision it was a great deal, but PlayStation is no longer the only platform high-end JRPG enthusiasts use (although it is still the one where they are over-represented). But I think a big part of the reason for Atlus's progress in the last few years is moving to true multiplatform with simultaneous release, and there you have Metaphor: Refantazio, competing with FFVII: Rebirth despite being a completely new IP10.

Lack of promotion

One of the complaints you hear the most from Square Enix fans of late is that FFVII: Rebirth has barely been publicized. That tracks with my subjective impression. At the same time, it was released only 8 months after FFXVI, and while those are different properties really, in terms of promotion it is harder to make yet another FF resonate… so it seems they didn't try too hard.

I suspect the same applies to other games in the lineup discussed before, as there was just too much in the lineup competing for attention.

A light at the end of the tunnel

A lot of these problems are being solved already (lack of promotion and cannibalization are a result of the COVID glut), and I think the company is taking steps to address the rest, as we will see in part 3. This FY the release lineup has been a lot less ambitious (a SaGa game, a Life is Strange one, Visions of Mana, and everything else are remakes - Dragon Quest III, Fantasian, Romancing SaGa 2, Kingdom Hearts HD11), but is working decently, especially Dragon Quest III.

The only confirmed game for 2025 is another Dragon Quest remake, but we also know they are working on Dragon Quest XII and Kingdom Hearts IV, although they don't have release dates. I am especially interested in the path that the Dragon Quest IP seems to be following, as we will discuss in that section. But the main point is that we know they are

1. Mostly working on multiplatform titles

2. In their core area and evolving their core properties

3. They terminated some external publishing contracts, like the one with PCF

4. The pipeline is not so clogged anymore

Maybe I'm stupid, but I think it might work.

MMOs: Square Enix's bright spot

We have been talking about Square Enix's woes, and we need to talk as well about their brightest spot. MMOs have slumped a bit in the last couple of years, but they are recovering in H1 thanks to the release of FFXIV: Dawntrail. And despite the lack of expansion packs for FFXIV since FY22, FY23 and 24 were above any pre-COVID years still. FY25 is shaping up to be close to the FY22 record, although I don't think it will surpass it.

With only 2 games based on the core properties of the company (FF and DQ), there is not much else to say about this segment, other than the upcoming FFXIV mobile version. We could talk about their initial attempt with FFXI, and also the first failed attempt with FFXIV, until A Realm Reborn came out. But I will just say this: through trial and error, they have become experts in operating MMOs. Dragon Quest sadly only has traction in Japan, as happens with the rest of the franchise.

About the mobile version, it is being developed by a Tencent subsidiary, and I'm not sure I am convinced about its potential impact, given that reportedly it won't be interoperable with the main one and it only contains A realm reborn content, not the one from the expansions afterward.

Personally, my impression is that the MMO segment will continue being a good profit engine, but it is hard to see it growing a lot as of now (although my impression is that FFXIV has increased pin opularity in the West in the last few years). So I expect the same pattern of a bump every three years with large expansion packs and then back to the baseline. But I don't expect incredible growth from that baseline.

Mobile

Not a core strength and an area where Square Enix is more than happy to iterate with different external developers and stick to what works. The extent to which that happens is illustrated in this Reddit compilation

In most cases, the monetization is not great and they are just killed after one or two years. But the success of Dragon Quest Walk (mainly), Dragon Quest Tact, and FFVII: Ever Crisis in Japan12 has been enough to finance all this and then more. Mobile games are usually a lot cheaper, and it is worth it to just release and see what sticks, as long as they don't keep spending in something that has no traction. It seems like so far they have been doing well.

Nevertheless, revenue is going down since COVID, and it is going to be hard to replicate Dragon Quest Walk's success (regularly in the top50 for grossing in Japan after 5 years of operation). I am not extremely hopeful about them finding a new global success while throwing spaghetti at the wall, but probably a better decision than buying Rovio or some equivalent! For now, I expect the downward trend to continue.

The videogame IPs

The most valuable aspect of Square Enix is not their current state of operations, but their IP, as a proxy for their fanbase. That is what could enable them to make more money or not go under too much in bad times.

Final Fantasy

Final Fantasy has been around for some time, as the evolution in Cloud's image shows. And that was the 7th entry in the series! At the same time, Final Fantasy is, in a way that is very typical in long-running JRPG series, not a single property. It follows the same schema as the Tales series of Bandai Namco, or the Shin Megami Tensei series of SEGA/Atlus. Roughly each of the games in the series takes place in a different universe, but they share concepts and gameplay. Contrary to other franchises, Square Enix didn't make the effort to separate the brands of the different spawned IPs (as Atlus did with Persona).

In the case of Final Fantasy, I think we can talk about 4 distinct properties, really

Main series

The series itself has a lot of brand recognition, and every new installment sells several million copies at a minimum. The next installment would be FFXVII. While they used to be common, nowadays the gap between mainline entries spans several years. Between XV and XVI it was 7 years, so every release is a relevant event… but not so much in terms of sales, recently.

The gap between releases is easily explained by all the other derivatives ongoing FF properties have, and because they have become just… massive endeavors. They have levels of effort and budget only comparable to the biggest AAAs. Sadly, the level of sales was not quite there for the last entry, FFXVI. It did sell relatively well for a game without a PS4 version (only Spider-Man 2 sold more that year), but with a relatively low installed base and failing to be the absolute reference, the revenue was not enough to offset other failures in the year.

While the popularity of the franchise is still high, it is no longer the only JRPG reference (Atlus is competing well) and the RPG scene has a lot more competition than it used to, so it is probably hard to maintain profitability at this level of expense, at least without going multiplatform.

Final Fantasy VII

Final Fantasy VII was the most successful game in the series, none has ever equaled it again in terms of impact or sales (excluding MMOs). In the last few years, Square Enix set out to capitalize on it and has tried to develop extensively that setting, with mixed success

• A new trilogy of main games

  • Remake (2020), did amazingly, with more than 5 million copies sold in PlayStation, more than 1.5 on PC, and well played in PS+, bringing total sales estimations to more than $800 million13.

  • Rebirth (2024) which did… meh. Part of it is because it has come out only in PS5, only 8 months after XVI and with a lackluster marketing push. The PC version seems to be doing decent presales and is coming out in January. Sales estimates at this point are below $200 million.

  • A third part of the series is expected to be released in 2027 (as it matches FFVII 30th anniversary), but without a confirmed date.

• Crisis Core: Reunion (2022), a remake of a FFVII prequel released in 2007. It sold a bit more than a million copies (which is expected, given the success of the original)

• FFVII Ever Crisis, the only mobile game that seems to have been working for Square Enix in the last few years.

In short, this world is getting quite a lot of content and while Remake did incredibly, Rebirth didn't. That said, Rebirth was critically acclaimed, is doing decently in PC presales, and shows early signs of becoming a fan favorite, so there is still hope. I think the marketing was what failed here mostly.

FFVII is also the source of a good chunk of merchandising and licensing revenue. It is not disclosed how much, but more than 40% of their current figures catalog (and 23% of the overall merchandise one) is FFVII-related.

Final Fantasy XIV

The MMO is set in a different universe, and while the mainline or FFVII games can be a gateway drug that leads you here, the conversion is not necessarily high. But at this point, it has its own very dedicated fanbase, and the once-every-three-years expansion seems sustainable. It is not experiencing a massive decay in players yet, but Dawntrail has been a bit divisive among the fanbase, partly because of the story, partly because of a more realistic orientation of the graphics, rather than the more anime-like (and lower fi) look the game had previously.

Revenue-wise it did more than alright in H1, but the next quarters need monitoring to see if it was only a few people complaining very loudly or if it has large fallout. Early indications (Steam CCU - not the main platform, Activeplayer…) seem to indicate the June-July spike didn't hold this time and the expansion won't revitalize the game, so it could continue its decline.

In terms of merchandise, they are also really strong, the only ones with more items in the catalog than VII (though not in the figures department!)

Final Fantasy X

The tenth installment of the series was very successful, almost at VII levels, and spawned a sequel (imaginatively named X-2). While there have been some compilations and a remaster (released to several platforms from 2013 to 2019), this branch of the IP has been mostly dormant in the last few years, but could be recovered at some point as VII was.

Other extension candidates (FFXIII/XV)

FFXIII and XV share some lore, but not universes, along with FFXIII-2 and Type 0. And they also shared success, being, I think, the most successful games between X and VII Remake.

A revival of either the lore (Fabula Nova Cristalys) or one of the universes is also an option.

And the future?

It is difficult to settle what is the value of the FF IP as a whole, but the MMO alone brings about $200 million14 of high margin revenue every year (will be more this time thanks to Dawntrail). And several of the games (XIII, XV, a couple in the VII universe…) have generated close to a billion in sales each. While they have high budgets (probably $100 million or more), when one of these games works, it returns huge profits. In my opinion 2-3B is a conservative estimate, but also a useless one if they company is not able to use the IP well.

The short term future of Final Fantasy seems to be keeping the back catalog going (though HD editions, bundles like the I-VI…) and keep operating the MMO, while the new VII game drops. The next mainline is too far away, and there are no hints of other revivals yet. Contrary to other people, I don't think the budget of the mainline FFs is a problem, and I think they all have been profitable, except maybe Rebirth, and I think it will be so in time, there is a lot of waste in Square Enix, but it was mostly in the other games mentioned earlier.

But they need proper support and spacing of the releases. Making a game like Rebirth for 4 or 5 years to drop it 8 months after another mainline game in a relatively small installed base without much marketing is just a waste of resources. Let's hope the IP gets better treatment in terms of marketing and release windows in the future. Quality-wise, they haven't dropped the ball.

Dragon Quest

Toriyama aesthetics JRPGs running for 35 years, what is not to love? And the Japanese sure love them! For example, the recently released Dragon Quest III 2D HD remake has sold more than 800k physical copies only for Switch in Japan, without taking into account any other countries, platforms, or digital sales.

In the same way as Final Fantasy, it does have shared themes, mechanics, and aesthetics, but there is no direct continuity between installments (except for the first three). They do share aesthetics and usually a fairly straightforward chosen-one storytelling, versus the more social/moral conflicts-based storytelling in Final Fantasy.

It has never gained a similar level of international popularity, but it is such a household name in Japan that it does not matter. They even have a Pokemon Go - like game that is making the bulk of revenue for the SD division (although in decline now!), and Dragon Quest X, the MMO, has also been very popular, but was never localized outside of Japan, so it is only there.

The latest full installment, Dragon Quest XI, was fairly successful, with about 7 million units shipped worldwide (including all editions). More than 5.3 of them in Japan15.

So what would I wish for this franchise? Well, obviously, to get to some popularity outside of Japan through well localised HD editions, then a good modern release also well localised and marketed, and then maybe even localise and open the MMO. With Toriyama's style popularity all over the world, it could even work!

Cue the HD-2D remakes for Dragon Quest III, released this year, and Dragon Quest I-II, released the next. That said, it seems like instead of a way of popularising the series in the west, someone at Square Enix thought that a 2D remake could command premium pricing (60$, so not quite AAA estandard nowadays16, but close) in 2024 outside of Japan as well, where it is essentially a collectors item for a well beloved IP17. Hope they start discounting outside Japan early and often and maybe they can get some nostalgics on board… that then can get more people. And hope they think better about pricing for I-II (again, outside of Japan).

In any case, the franchise is well. I estimate the MMO brings in north of $100 million of high margin revenue18 every year, and mainline games tend to do $400-500 million in revenue. A far cry from FF, where the good ones did close to $1 billion, but far more impressive considering the geographic lack of distribution.

Kingdom Hearts

Probably the last of the big IPs, but one we should not forget. The action RPG series has sold less than the other two, but only because it is by far the youngest. Contrary to the other series, in this case there is a continuity between games. It is also a shared IP from which Disney gets royalties (and their characters feature prominently). It is also important to consider that it is a global IP, maybe even West-oriented, instead of Japan only like Dragon Quest.

The last one in the franchise (out of the mainline ones, there are spin-offs and mobile games) was Kingdom Hearts III, in 2019, and it had sold 6.7 units in 2022, so probably it passed 7 by now. Kingdom Hearts IV is in preparation, but there is no release date, although the rumour is 202619. There is also Missing Link, a mobile game expected to come out in 2025.

Honorable mentions

NieR maybe hasn't sold as many games as FF, but I bet in terms of merch it has been a close run, and then there is the anime series, and the games still sell well, with NieR Automata selling over 8 million units -and still selling decently every year. Just Cause also sold well… except Just Cause 4, the latest entry in 2018, that seems to have sent the series into oblivion. Mana and SaGa are alive and well, and are also not very high-cost productions usually, and you still have things like Chrono, Star Ocean or the recent Octopath Traveller, all still above 4 million units sold per franchise.

Square Enix has a cost problem, but not an IP one.

Conclusions

The biggest strenght of Square Enix's videogame segment is the already well established IPs it has, with at least 3 evergreen IPs, and 2 or 3 more that would be considered as such in almost any other publisher.

The MMO segment is in soft decline due to age, but supported by those properties and thanks to update cycles the decline is not too steep (and might even revert at some point, with updates that are more popular), and the SD segment is in a steeper decline (but of less relevance, given the difference in margin and that a big part of both development and management costs are external).

HD… well, it has been a disaster for years, but I think it is on the mend. They seem to be releasing less overlapping games already, and hopefully they will also be more careful with costs. The management of the IPs, in terms of caring for them and not releasing crappy stuff that can undermine it, is there. But there are a lot of unknowns.

There is also one problem that has me a bit worried. In FY22-23, blockchain was a great focus and they put Symbiogenesis NFTs out, now they are supposed to have a huge focus on using AI for development… not to mention the Splatoon-inspired flop of the year20 I don't know, guys. Just make games, don't make too many, don't try to follow too many random trends at once. Your shareholders will surely appreciate that more than random mentions to blockchain.

Overall, I think seeing it returning to FY22 profitability levels is… just not happening soon. MMOs and SD were supercharged by the pandemic (and HD as well). But the profitability levels of FY23 don't seem that far-fetched. And FY23 profitability levels with the current strenght of the non-gaming segments would make for an interesting PNL.

But we will talk more about the PNL in the last installment. We will go over corporate governance, capital allocation and valuation scenarios, now that we know the IPs, a bit of their history and the outline of how each of the main ones is being treated.

Hope this article was useful, if so, please don't forget to share it with anyone that might find so as well!

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Final Fantasy: The Spirits Within was a tremendous overtaking at the technical level, displaying the best CGI yet. It was also a complete and utter failure at the box office despite a marketing campaign that pulled all the stops (including a Maxim cover by the CGI lead character). It caused a lot of financial damage to Square and ended the talks of a potential fusion between Square and Enix. Yet it eventually happened.

How Square Enix came to be

Enix was a very profitable company in the 90s but had failed to expand their business outside of Japan. It had a mix of publishing and videogames (with Dragon Quest being their main brand), and the customary Japanese pile of cash. While their current business was alright, they could see the writing on the wall and no path to being global. So they went out shopping.

Square was very different, more adventurous. And it had wild success releasing their JRPGs both in Japan and in the West, especially once PlayStation arrived. Chrono Trigger was already a success, but it was Final Fantasy VII, the first game they developed2 for Sony's console, that made their reputation (and a lot of profit). But they never stopped betting on new stuff, and that came with some wild swings in their profit margins. In particular, the film mentioned above caused a lot of losses and stopped the acquisition talks for the time being. It was, in effect, the death of the old Square.

Yoichi Wada took over as CEO in 2001 after the losses of the film became apparent and focused a lot more on stable profits. Wada didn't come from the gaming industry, but from investment banking, having joined Square only a year and a half before, and took the opportunity offered by the losses to take the leading role at a time when probably being from outside the industry was a plus (as the company was reeling from the film losses). He did squeeze a lot more profit, partly out of luck. Kingdom Hearts, already very advanced when he took over, came out only 4 months later, and it would become one of the mainstay franchises for the group.

Three years later, with Square being now clearly bigger than Enix then, the fusion proceeded, and Wada led the combined group. His reign was lackluster but is the origin of the modern Square Enix.

Why is Square Enix interesting?

Because they own one of the biggest IP libraries in Japan. At first glance, part of the company is underperforming (video games!), part is under-monetized (manga!) and all of seems to be intertwined in too big of a corporate structure. Will that continue to be the case or is there a light at the end of the tunnel?

Square Enix is currently valued at 750B yen (or almost $5B), generated 350B yen in revenue last year, and only 14B in profits, although in prior years it had been around 50B. They have around 220B in net cash as well. So the valuation is not extremely demanding if they can get back to that or surpass it, but it is also not ridiculously low.

Let's have a first overview of their divisions:

• Videogames: 70% of the revenues of the company, and their biggest profit source, when things go right. It is further subdivided into HD games (Final Fantasy / Dragon Quest/ Octopath Traveler/ SaGa… main releases and other titles3), SD games (browser and mobile games), where Dragon Quest-derived titles provide the bulk of the revenue and MMOs (FFXIV and Dragon Quest X). The bulk of the profits comes from MMO and SD (MMOs have lower revenue but higher margins), while the HD segment provides prestige and coverage. About 3800 employees in FY 2024.

• Amusement: Direct management of arcades and amusement facilities, plus providing arcade machines to other facilities. This business comes from the acquisition of Taito in 2005. Used to be a decaying business, but after COVID it is experiencing decent growth in revenue and, especially, margins (reaching 12% in FY24)4. About 2000 employees5.

• Publishing: With Enix came their manga publishing branch (and other things, like game guides6). But the important property here is the manga. While the star is Fullmetal Alchemist, and the series ended a long time ago, there are other interesting properties like The Apothecary Diaries or Daemons of the Shadow Realm, and as such they get a participation on anime, merch… made of those series. Consistently, it is the second biggest profit center of the company. It has doubled revenue and tripled its operating profit to almost 12B yen thanks to the success in electronic manga publishing and The Apothecary Diaries anime success7. About 200 employees

• Merchandising: Talking about royalties and merch… the royalties they get are booked here, as are their own sales of collectibles (mostly from their own videogames, but also some Sega properties). It has been growing consistently, doing almost 6x the operating profit of 2019 (0.9B) in 2024 (5.6B). 70 employees.

To this, we have to add the corporate structure, which has more than 500 employees and costs about 18B a year.

What I find more interesting about Square Enix is its impressive IP library. It has an extensive manga library, and its videogame IP is difficult to equal, even if it is not managed perfectly right now. I think the value of that IP is bigger than the current market cap, but we have to see how they are doing in extracting profits from it. And it is an ideal time to do so, with a recent change in CEO after a bad FY24 and with a recently presented strategic plan.

I am going to review each of the businesses in detail with their numbers and perspectives. First with all other segments in this part, then in the videogame segment in part two. Then we can go over the new strategic plan, CEO, and how capital allocation is working in recent times in part three.

Square Enix's minor segments

Talking about minor segments here is a misnomer. We are talking about the 5th biggest manga publisher8, a licensing segment that pulls more revenue than, for example, IG Port, and an amusement segment on par with Bandai Namco's and about 60% of Genda's. But they are smaller than the gaming one, and not typically valued when looking at the company as a whole. And I think that is a big mistake.

Amusement centers & arcade machines

Under the heading of amusements, we find two very different segments. One, is the management of amusement facilities, and another is the sale of arcade games and machines to other facilities. Sadly, Square Enix does not break down sales for each.

Overall, the segment has been doing well since COVID, doing record sales and profits in FY2024, with H125 being even slightly better in both sales and profitability. It is difficult to know exactly what is driving the increase there, but my suspicion is that it has two prongs (and it is industry-wide because we see other players benefiting from the trend, like Genda9 or Bandai managing arcades, and Round1/SK10 , Furyu or Sanrio selling to them11)

1. Better monetization through crane machines and gacha: The sales of what is usually termed prize figures have gone really well in the last few years. Furyu estimates 5% pa growth since 2019 (although they have multiplied their sales by more than 3 in the category).

2. They are just cool again I guess? Difficult to have proof, but it seems like arcades are getting more popular of late, not less. It is a relatively cheap way to pass the time, and it has the 80s-90s nostalgia pull. Some players are opening new ones (Bandai Namco), others are targeting the US for expansion (Genda, Round1)

Square Enix owns the Taito Station brand. While they operate some centers and others are franchises, it is not clear what the breakdown is for the around 160 centers they have.

In terms of numbers, this is what it looks like. 2024 was a record year with 61.5B yen in revenue and 7.5B yen in operating profit, and H1 2025 is looking even better, with a 30% operating profit increase (on a 27% revenue increase). Since the disclosure is almost non-existent, knowing the breakdown is difficult. I think some of the new stores are franchises (not that much land or machines in the balance sheet despite new openings in 2023-2024, although there is some increase) and expansion12 is partly driving the revenue. I suspect about a quarter of 2024's revenue is machines sold to other parties (including franchisees), but that is based on FY21 Q1 revenue when the managed stores had to be closed because of COVID, so I am assuming most of the revenue there came from machines sold (agreed upon at a prior date). Faulty, I know, but the best indication I have!

This is a business in clear expansion, and stores overseas (only HK for now) seem to be working well. What worries me is that there can be a fadish element to the recent years expansion. I do think stores have a better business model now industry-wide, thanks to the prize segment (gacha, crane…)13 being a bigger part of the mix, and I think tourism helps. But foot traffic might decrease if the nostalgia wave wanes a bit.

In terms of valuation, this is a capital-efficient business (although with relatively low margin), with about 11B yen carried in the books14, and 7.5B in operating profit. Even if we attribute part of the corporate structure costs (say 2B) and consider this is actually 5.5B in operating profit and a tax rate of 30%15, a 3.9B post-tax profit of it is a decent unlevered return on assets (35%), with the capacity to reinvest part of the earnings back into the business at good returns and growing LFL. At the same time, Taito is a recognized brand in the space and Square Enix owns some classical arcade properties (Space Invaders) and a huge videogame catalog that gives them a slight advantage. 100B yen would not be a crazy valuation16 for this business and might in fact be cheap if it is not extremely fadish. You can see Genda, which is only a bit bigger than the amusement segment here, being valued currently at almost 300B yen EV, although part of it comes from the markets loving their aggressive capital allocation17. So for my SOTP (and yes, I can hear everybody groan at the mention!) I am going to stick to the initial number

Publishing

Publishing is more traditional and understandable. What is surprising at first look is that it is… growing? Publishing revenue and profit has more than doubled since 2019, although profits have been roughly flat since FY21.

While it is tempting to think of COVID as the main catalyst here, the trend was already good since 2017, when digital sales started to compensate for the decrease of paper ones.

In the last few years, aside from their sizable back-catalog, they have been pretty good with the things they have selected, and while they publish less series than other publishers, they have been even competing with Kadokawa at times in sales thanks to the success of The Apothecary Diaries18, Daemons of the Shadow Realm and My Dress-up Darling, aside from the already well established Black butler and Soul Eater and their videogame license comics (Final Fantasy and Dragon Quest).

I think there is something going well both in promotion and selection of works in the last few years that is allowing Square Enix to punch well above its weight. It shows in the margins too! Merchandise and IP revenue is not included in this, so it should be fairly lower, and yet we se close to 40% operating margins. Now, expenses are likely to be slightly under-reported (let's remember Square Enix huge unallocated section), and we have to take tax into consideration as well, but their margins are still incredible versus comparables. Mag Garden (IG Port) has a 20% operating margin, and Kadokawa's publishing segment has around 10% margins or below, depending on the year.

What that indicates to me is that Square Enix is winning on selection, not on volume. I don't know if that will continue, but as long as they continue to exhibit this level of good taste, they are going to continue gaining share without having to publish lots of titles.

Let's do the same valuation exercise. Say we take 2B yen of those corporate expenses19 and apply the 30% tax rate we talked about before20. We get 7B yen in profit after tax. Pretty close to cash earnings (barely anything in the balance sheet other than corporate office buildings). Profit growth is a bit less constant, especially as margins have eroded slightly since 2021. Purely as a business, we could slap a 100-150B tag on it and be content with it, but that would not reflect reality all that well.

This segment is the one that generates a good chunk of the IP that then gets exploited in the next one, including money flowing from anime adaptations, which is not booked here. And as we can see, albeit small, that one is growing fast. Guess for our SOTP we can stick with the high end of what I was discussing, but we need to take into account that some of the potential in the Merchandising area comes from here really. Also, the back-catalog of IP (FMA and Soul Eater are the main ones, but there is a lot of depth21) is valuable, and we are seeing that it can trigger interest (see Sony's ongoing attempt to acquire Kadokawa). Oh well, let's slap the 150B tag and be done with it!

Merchandising?

This is a bit of a weird segment, in that the name and the contents match only partially. This segment has Square Enix-produced anime figures (mainly NieR automata and Final Fantasy ones), but it is also where all royalty revenue is recorded, along with anime-related revenue. Maybe that's why that is not the name of the segment in Japanese (ライツ・プロパティ等事業, which apparently translates to Rights, property, and others22 and makes a bit more sense)

Confusing translation choices aside, the business is doing alright

H1 25 has seen a YoY operating profit increase of 80% on a 16% increase in revenue. I don't think the increase will be that big for the full year, but not a bad sign! In this case, the increase in margins in H1 seems to have been driven by the increase in the mix of Masterline figures (or at least that is what the H1 earnings release hints at), which have a price that is a bit unhinged if you ask me

But then again, people pay for it!

It is difficult to get an idea of what the mix is in this segment in terms of royalties versus figures. My impression is that royalties have been increasing steadily, as operating margins have gone from around 12% in 2019 to around 30% (with H1 at a record high 35%). Other players in the industry like Kotobukiya or Furyu regularly record margins around 10-15%, so 30% is definitely anomalous unless rights have picked up23.

For me, this is the most unpredictable segment, maybe because it is an amalgamation of things. Doing the same exercise of attributing 1B of the corporate structure, I think we could easily value this at 50-75B yen, as it has been growing long term (although 2019 is a particularly favorable year for that comparison)

Minor segments wrap-up

When you put all of the minor segments together, you have a business that has multiplied by 4 its operating profit since 2019 and is still growing strongly, with a revenue CAGR of close to 10% and clear operating leverage. The price tag we have put on these businesses is of 300B yen when doing the SOTP business by business, and looking at their recent performance I don't think is a price that is too expensive. Not only that, but in 2019 that evaluation would have been much lower. 100B perhaps? Less?

Square Enix currently trades at a 750B valuation, and 200B of those are, roughly, net cash. The only question that is left to answer is… is the videogame segment that bad? Has it evolved so little, even with the COVID boom, that the evolution of the other segments can't compensate for it?

That is a question that will have to wait for the next part, which will drop in the next few days. Subscribe to avoid missing it!

Update: all parts are now available! You can check them here:

Now, this is not something to take lightly. Something I highlighted in the original article (that you can check below) is Cover's low churn as a competitive advantage, as talent is key, and replacement is not really an option. Talent leaving is the biggest risk for this company by far.

In terms of numbers, Aqua had around 2M subscribers (she got a big boost after leaving), Amelia 1.8 M and both Chloe and Fauna sit around 1 M (a bit more for Chloe, a bit less for Fauna) and all were relevant inside their generations. Aqua in particular was one of the most popular streamers in the agency, close to the top in hours watched and average concurrent viewers.

Hololive had 40 channels above 1 million subscribers at the end of September (that is, after Aqua left), and 39 currently (after Amelia left), but a few (Bales, Rosenthal, Raden) are close to that target and the new channels are growing well. We will likely see around 40 in Q3 (with the new 2 leavers still on, as they will leave in January) and 40 or more by the end of March if there are no new losses.

And the likelihood of that is what I would like to discuss!

First, a certain rate of attrition, while not exactly desirable, is to be expected, and Hololive (leaving out Holostars, the male branch1) had an extremely low attrition rate so far, with only 3 voluntary leavers before this year, out of 79 streamers2. That's not annual, that's since 2019! This year, they have had 4 streamers leaving voluntarily plus one dismissal. Sky-high in comparison, but not that high in context. And then, there is the nature of the cases.

• Minato Aqua just seems to prefer focusing on doing her own stuff with minimal supervision, or that is what the messaging seemed to be. And that is normal. Unless you want to do live events, past a certain subscriber base it is probably more profitable to go without an agency, and she is simply big enough to try (her new channel is already close to 1 million subscribers). She has released already several songs (relevant in a bit!)

• Amelia Watson seems to be a similar case. She has since revealed she was a foley specialist (and an Emmy-winning one, apparently!), and it was well-known that she was into the technicalities of streaming and models for a long time, and has been releasing animations. Her model also seems a bit more advanced than usual. Again, a case where she had some hunger to do something different, and a relevant fanbase to capitalise on (she has now around 400k subscribers in her new channel)

• Sakamata Chloe essentially cited workload, as all the songs and live concerts and the like require a lot of additional work behind the scenes.

• Ceres Fauna has said that she is leaving because of disagreements with management, but that she liked the idol stuff.

So we have someone who preferred no corporate supervision, someone who wanted to go in a different direction creatively, someone who preferred a more relaxed schedule and someone that liked all that but couldn't find accommodation inside the company for whatever reason (can be percentage cut, can be number of activities, what she promoted… who knows). Even in that last case, the departure won't be sudden, and was announced a month in advance, and in two out of four there might be occasional collaboration. All of them have talked glowingly about the rest of the talent in the agency, too.

The narrative that has emerged from this is that Cover is in danger of losing a lot of streamers because they are pushing the music/idol stuff too much. That seems to fit two cases at best (since Aqua is doing it anyway, and Fauna has mentioned she liked it actually). And inside Hololive there seems to be some flexibility, at least in some cases, for long breaks (Gura, Ina'nis) and focusing on some areas more than others. Not only that, some of their most popular streamers seem to be actively pushing for it (Suisei, Marine or Mori being the most prominent). This direction might push some streamers out, but seems a good way to solidify the relationship with others (publishing and organizing large events are something you kinda need an agency, or a very large following, for).

In any case, very different from Nijisanji where aside from a much higher attrition rate over time there were… harsh words between talent, accusations of harassment and even some mentioning attempted suicide because of the environment. Huge, huge difference, in my view.

There is an additional phenomenon that I have seen in startups before, and you might be familiar with… and that I think is what we are seeing, although this is just a guess. For a few years, no one (really liked) leaves, or at least it happens extremely rarely. And then after a few years there is one or two waves of people that decide they will be better off elsewhere. And when I have seen it, it was a cascade. Someone key leaves, and suddenly other people start thinking about it. And then, suddenly, it is over and things continue to go along. In this case, I think Aqua has played that role. I don't know if Fauna is the last or there will be someone else. But I think it is due to people reflecting on their opportunities after a few years and with a trigger, and not to Hololive falling apart.

Well, hope this has been useful for you, to understand a bit better the situation, even if you don't agree with the conclusions! As for me, I'll get back to looking into Square Enix stuff!

Asmodee: the tabletop market leader

I find the IPO by spin-off of Asmodee really interesting, because it has long been a company I would like to know better, but the disclosure was typically not that great. The information available through Eurazeo back in the day was barely anything, and in between then and the sale to Embracer, even less. Embracer has since been preoccupied with the failures in the videogame business, and their disclosures focused on that (even if, arguably, Asmodee's purchase was what tipped the company over due to the leverage involved). So let's see what the CPM has revealed1.

You can think of Asmodee as a mini-Embracer, in that they dedicated themselves to acquire many companies and then kept operating their brands separately. But mostly, Asmodee is a distribution network for both their own games and third party ones. In fact, the split favours the latter!

Asmodee has always been a mixed player, and it is in many ways more of a toy company than a hobby one. Their first success, Jungle Speed, is decidedly in the mass-market party game category, subject to the ebbs and flows of fashion, rather than a niche hobby with a dedicated player base. But they also started distributing other games, like the Pokemon TCG2, which they levered into better distribution relationships.

Then they took private equity money and went into a huge acquisition spree, taking advantage of both cheap debt and decent growth in the boardgame market. They acquired both distributors and game design studies, reinforcing the effect of each other, and they are now probably the second-biggest company in the world of tabletop games in terms of sales3. But in that race, they didn't make much of a distinction between different games and now they classify what they own in three different segments

• Social games, or what we know as party games. Cheap, short, fast paced, easy to learn and play. Economically, they are profitable, but not recurring. Subject to fades.

• Boardgames, that compete with the likes of Monopoly. In this sub-segment, I think Asmodee is the worldwide leader, with brands as Ticket to ride or 7 Wonders. Longer, rules can be a bit more complicated4. Here, there is the possibility of having a brand, expansions… and hence more recurring sales. But it is mixed, as most of the sales are really stand-alone.

• Hobby games5, like TTRPGs, TCGs, and miniature games6. They tend to consume a big chunk of the player's leisure and are more complex, either because of the meta or because of the rules. Really profitable, and really recurring if it sticks (see Games Workshop, or what Magic has been to Wizards/Hasbro)

Let's look at their sales breakdown

Boardgames includes miniatures. So basically, TCGs make up 46% of Asmodee's revenue. That helps explain as well why the third party segment is 64% in the prior graph. Pokemon and Magic. They also further disclose the breakdown of Asmodee's board game sales in terms of categories:

The idea is that inside boardgames, the games that grow the most are strategy (or euro-games, really, meaning more elaborate games for enthusiasts in this context) and party games, and that is the majority of Asmodee's portfolio, with a smaller share of family games (and almost none to kids games). I don't know exactly how they classify it brand by brand, but it adds up with what I know of their portfolio. But keep in mind this does not include TCGs, the market for which has also been increasing slightly faster than the board game market.

So Asmodee is well positioned in the market for the categories that have more growth. Now… what I am not that sure about is about boardgames being a growth category anymore.

As you can see, and this is according to Asmodee's information, tabletop games peaked in 2020, and have been decreasing since despite inflation. The estimated growth in 2024 would not compensate for it, but in Asmodee they assume a return to growth. I am not so sure.

As was very well explained in the CMD, the growth categories are party games (with lower barriers to entry and competition from other toy makers) and strategy (more specialised, more dependent on hobby stores and showcases). Problem is the strategy segment is clearly slowing down, at least in the US, far more than is shown here (at least according to ICv2 reports, as I wrote back in April). So I have some doubts about Asmodee's growth in the boardgame segment not because of Asmodee, but because the trend seems to have stopped. Here, the cleanest data I have is the Kickstarter funding in the boardgame category. Kickstarter-funded games tend to be in the heavy hobby segment, basically what Asmodee deems strategic, although there are some TCGs as well (Altered being the main one). I have been able to gather the following, based on the 5400 most-funded tabletop gaming projects in Kickstarter's history (so not complete, but directionally correct7).

Part of the decline is driven by the rise of Gamefound8, an alternative site for games, but not all, and it seems clear to me, taking into account hobby channel data (centered in strategy games) and Kickstarter (also predominantly in that segment) that the perspectives there are not as rosy as Asmodee is saying.

TCG & miniatures

Half of Asmodee's sales are TCGs, and a decent chunk of the others are miniature sales, so I would like to talk about their position there, because these are growing and very profitable markets, as Hasbro and Games Workshop prove time and again, and this is probably where Asmodee will make or break.

In miniatures, I think there is a reason they barely talk about Atomic Mass Games and the miniatures it has. The reason being they have been steadily losing share since the heyday of X-wing, when Fantasy Flight Games9 challenged WHFB/Warhammer Age of Sigmar as the second biggest miniature game worldwide10. From what I know, Marvel Crisis Protocol is doing fine, while Shatterpoint and Legion, the Star Wars licensed games are far slower. Given that they were not able to sustain the X-Wing push and ended up retiring the game a few months ago11, I expect the same thing will happen with these ones. Once Disney's new films died down, so did X-wing. So will the other Star Wars games and Crisis Protocol in time.

The point I am trying to make here is that Asmodee doesn't have a self-sustaining own-IP game. They rely on the marketing push from their IP partners, and they pay a hefty royalty for it. So I don't expect their miniature games to be a big driver in the long run. They require a dedication FFG used to have, but Asmodee hasn't. Plus, miniature games have higher costs than TCGs, and Asmodee seems to be very focused on having a capital light model. Granted, you can achieve that on scale (look at Games Workshop) in minis, but you have to push for scale first.

In TCGs, the situation is different. Most of their TCG sales come from partners (Pokemon, Magic). Asmodee here provides the local logistics and gets precious little margin, being between the IP owners and retail. The good part is that they can use those massive TCG sales to get sales relationships with every retailer, and then can push their own TCGs and events on those. For the most part, and except for Arkham Horror, Asmodee's TCGs are licenses from other companies on the back of already existing IP. Star Wars Unlimited is currently the biggest one they have, and they are pushing for its use and helping organise competitive events. TCGs have very high gross margins, and the only real cost is marketing (including event organization).

In TCGs there is another dynamic that helps Asmodee's position too. It is a highly fadish area, other than the biggest games12. You see lots of annual releases from anime, games or even vtubers13. They are well positioned to either do that with their own IP or licenses, or to get part of the pie from the smaller competitors, or firms that simply do not wish to have a complicated set of retail accounts only for one game (which is why Asmodee distributes One Piece, Pokemon or Dragon Ball TCGs in many countries). While I think it is almost impossible they get a game in the top 3 in a stable manner, I think they are well positioned to take advantage of this other side, and I think it will be a growing and profitable business.

An IP factory?

There was a lot of emphasis on the IP side of things, on how Asmodee can create valuable IPs and make them cross-media. The evidence is pretty thin so far. The games they touched on have so far been light on sales14, and the film evidence (two adaptations of the Werewolves game increasing sales up to 150% on the week of release of one of them) is, in my view, not convincing. I would change my mind if they have significant royalties that show up in the next couple of periods, but I suspect that won't be the case.

Of the two IPs they set as candidates for further growth I think Legend of the Five Rings is an interesting and well fleshed out IP, but sadly not particularly popular. Arkham Horror can face a lot of competition without much protection, being another Lovecraft pastiche.

Overall, I just think the board-game to transmedia IP trip is long and dangerous, and only achievable in RPGs and similar stuff, where the backstory is part of the game. The latest examples I can think of are Numenera (2013) and World of Darkness (1991), and only somewhat. The others (Warhammer, D&D) date back to the 80s or earlier, and took a long time to become transmedia success stories. And all had a relevant player base before making the jump, except maybe Numenera, which probably no one reading this has heard about15. If someone wants to bring-up Monopoly, I would like to remind you it was first released in 1935 and it was already top of mind when Monopoly Go! came out. Sure, the potential is there, but it is very uncertain and no brand has made the jump successfully in a while, at least that I know of.

All in all, a bit skeptical of this. So let's look at the finances.

Asmodee financial situation

Asmodee and Coffee Stain have been the only parts of Embracer's empire that have reliably made money. That said, Asmodee came with a leverage problem, and the EBIT produced was enough to pay down the interest, but not much more.

This year, the numbers are better so far thanks to the Star Wars TCG and an improved margin (7% EBIT margin), leading to an almost 50% increase in EBIT in H116. Even if that holds, and I think it will, it seems like their long-term target margins can't be too high17. Let's suppose they are able to improve the margin. They are also going to retain about 6B SEK in debt18, as Embracer is going to contribute part of the Easybrain sale to reduce the financial load. Let's assume they are going to be able to pay about 5% interest on this debt (current SEK base rate being 2.75%, and this being relatively highly levered). That leads me to this back of the envelope scenarios, none of them particularly pessimistic, as both assume growth and a reduction of interest paid

Say what you will, but I think 5 times EBIT is plenty of debt for a company that is not growing that much. Granted, I don't think Asmodee is super-sensitive to economic shocks, but it does have a high fixed cost base (their distribution network). A serious downturn can really hurt.

They are also planning to resume their M&A, now that they have a more manageable debt load. They have done well in the past, but that was, again, with cheap debt, away from public markets and in an environment of relevant growth both on their own and in their industry, and with higher margins than now. Personally, it doesn't seem prudent to me to do that if they don't manage to improve margins first.

Afterword

So far, the reaction to the CMD has been fairly muted and it is, I think, understandable. Asmodee is only one part of the conglomerate, and the results overall were not great, although I think that Eazybrain's sale was at a fantastic price and I am less queasy about the value of the whole group after it.

That said, I have my reservations about the path Asmodee seems to be taking. They have fantastic assets, but I am not convinced about how they are run. They had a really good opportunity to try to compete with Games Workshop in wargames from Fantasy Flight / Atomic Mass, and seem to have thrown the towel and go back to their acquisition strategy. But that only works in the long run if your current operations are a cash cow, and it feels like they need to improve quite a bit before they can be considered that. I have to admit that I mistrust the management and that colors my view, under a different management focused on the hobby games side rather than the M&A strategy or selling trans-media IP potential, I would probably be enthusiastic.

I just don't think it is the best approach.

Results and other news

That was all about Embracer and Asmodee! But it is not all, not yet!

Sony wants to acquire Kadokawa

Talks have been confirmed by Kadokawa, but no firm offer is on the table yet. In my view, the acquisition makes sense, and not because of what I think you are thinking. Sure, From Software and Acquired are interesting assets in the videogame world. But Kadokawa is valued at almost $4B, don't think Sony wants to pay a premium on that for those studios!

The manga and anime IP though? A different matter. Kadokawa is one of the largest publishers in Japan19, and has a deep, deep treasure trove of manga properties, some anime production capabilities and established relationships in the industry. Does that make sense for the company that owns Crunchyroll, Aniplex, A1 and CloverWorks? Yes, even at a relatively large premium.

Furyu: Purikura worse than expected, figures go well

Furyu has seen marked declines in profitability due to the decline of the Purikura business being more acute than expected. It should not worsen over the year, and guidance has not been modified because:

• It was already quite gloomy

• The figures business is doing decently, growing at 6% even after last year's crazy figures, as is the “new business", where Laid back camp season 3 has done fantastically, compensating for the bad performance of the videogame segment.

Overall, the faster decline of the purikura business damages the thesis, but I don't think it outright kills it (given the already existing load of cash and the growth in the figures sector), but we'll see.

Mandarake: bad trend continues, but management outlook is decent

It seems like I sold Mandarake at the bottom, but it also seems like the deterioration was not a matter of a single quarter.

They only managed to deliver 10% earnings growth on 12.5% growth on sales, which points at both margin deterioration in the last Q and sales stalling. Not good. But then the forecast points to 15B yen in sales and a 1.5B in earnings, so they expect some growth and also margin improvement. Mandarake doesn't typically guide optimistically. This was the guidance for last year (first row being the first half)

First half was a handsome beat, the second a bit worse than expected, overall the year was a bit better than expected, even after an unexpected downturn in the second half. Let's see how they deliver.

Other news

• Games Workshop released their first half trading update, with full results to be known in January. Bit of a monster beat, thanks to Space Marine 2 and very solid core sales. 24.9% up in operating profit against very tough comparables, especially when part of it comes from core sales going up 10%, is a fantastic result.

• Dan Da Dan is the new anime sensation. Not only its opening (which, as you can see, is beating all the records in YouTube for CrunchyRoll, only being surpassed by videos that have been more than three years in the platform). It also has high popularity in MyAnimeList and the mangas have been top 1 or 2 for weeks now (only a new One Piece volume was able to take the spot from the series). Looks like Aniplex (Sony) and Shueisha have caught lightning in a bottle. Sony is too big for this to move the needle, though!

• Crime Scene Cleaner keeps outperforming expectations and keeps selling over time. This is really important for PlayWay, as it could net about 7-10 million PLN in operating profit in Q4 thanks to that game alone, if the trend keeps up. Their operating profit in Q4 last year? 13.4 (although there were 20 million of impairments).

• Paradox Interactive proved that the Hearts of Iron IV brand is stronger than ever, with good sales and a new CCU peak for HoI IV after the new DLC was published. Probably the best Paradox release in a while, likely to make for a decent quarter.

• published another great writeup on Mansei Corporation, yet another Japanese net-net

After going through our five guest companies, I will also talk about another thing: This blog! I sent a survey last week (thank you for taking the time!), so let's discuss results and the next articles that you will see here!

Before that, I want to ask you one favor: Share this article (and others) if you like the blog! Whether it is on socials or through e-mail, it is hard to make some noise these days. Thanks for the help!

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And now, without further ado, let's start with…

Bloober Team

The horror specialists!

Valuation

• Market cap of 449m PLN with 66% free float (approx). Tencent owns 20%.

• 32.3 TTM PE. In this case, talking about earnings CAGR is not very useful, as the earnings are extremely volatile. Their record year was 2021, and I think they will surpass that slightly this year, depending on the Silent Hill 2 remake terms.

• 4.3 P/S with 49% 5-year revenue CAGR and 9.8% 2-year revenue CAGR

• Has not produced any FCF in the last 2 years or LTM1

• There was a 2.5 million PLN net share repurchase in 2021, but nothing in dividends or repurchases since.

• Net cash of about 15 million PLN

Strategy and present

First thing that comes to mind when you see this numbers should be… why on Earth do they trade this high? Second will probably be… wait, those margins are too low. And they are very related.

Most other companies we have been talking about earn most of their revenue from selling their games, but not Bloober, at least not for now. In 2023 they obtained about 80% of their revenues from publisher payments, with the other 20% coming from their catalog sales. Not only that, but a big portion of that revenue is redirected to third parties with which they subcontract.

Publishers typically pay by milestones, and there is not much profit margin until the game goes out (if it is a success, publishers typically recoup their costs before they start sharing revenue). Bloober has been able to milk some more profitability out of those revenues, at least according to their PNL2, but they have used pretty much all the money (and then some) to grow.

Now, will those margins change? Bloober just released the Silent Hill 2 remake, developed by them for Konami. In the last few years, about half their revenue has come from Asia, and it is very likely that the vast majority of it belonged to this contract3. Based on the revenue received from Asia in 2022, 2023 and H1 2024, I think likely that Bloober has already received more than 20 million $ in payments for Silent Hill 24. Although the game has been a success and has surpassed 1 million copies5, Horror is a niche segment and if they have already received that much, revenue share is probably not going to be huge. Much smaller than the current payments, for sure.

So what will happen with Bloober's revenue? Most likely it will go down, unless some of the other projects they have with editors picks up quickly. Since the most advanced one they had fell through and now they are self-publishing6, they won't see revenue until release, and actually will have to do a lump sum payment to Take Two on release to reimburse them for expenses already incurred in the game. The game is set to release at some point in 2025.

So results in 2025 (and H2 2024, although that depends a bit on the final milestones from Silent Hill) will probably see revenue down quite strongly (fewer milestones from Konami and none from Take Two partially compensated by revenue share from SH2, and maybe milestones from other projects), unless Cronos is a decent success. At the same time, Bloober needs to continue paying the third party studios with which they have publishing agreements of their own, and their own team. My impression is that the next 18 months of results are not going to look particularly well.

Where is Bloober going?

What will happen afterwards is the question. Because Bloober is not generating cash, but is generating a reputation, and they have several games ongoing internally (Cronos being the next one) and externally (not yet revealed, except under codenames). I am sure that the good reviews and sales from Silent Hill 2 will help them sell their future projects (and maybe even secure new agreements with publishers).

But at the same time, they have a lot of things to fund, only one release planned for 2025 without a lot of hype as of now and more limited sources of revenue, which means they will most likely have to take on debt.

Bloober is a very small company as of now. But they have used the revenue under the publishing agreements to grow aggressively. And with Layers of Fear (2023, not the original ones) underperforming, their best hope to compensate for their overextension was SH2 massively outperforming. And it has, but not as much as I think they need.

Is it investable?

In my view, no. Bloober is a good studio, and they have improved their reputation massively. But the breakdown of the deal with Take-Two for Cronos introduces enough funding risk for an already over-extended company7 that I wouldn't like to put my money here. Maybe I'm wrong and the SH2 revenue share is bigger than I expect because part of those payments that I think come from SH2 milestones are actually from other projects. But I am not going to risk it now!

That said, I don't think this is a company in immediate existential risk. Others can't say the same.

PCF Group

People Can Fly is a nice name for a gaming company. The company has not been flying as much as dropping like a stone.

Valuation

• Market cap of 342m PLN with 31% free float (approx).

• Loss-making last year, and TTM. In 2023 they lost 75 million PLN (mostly due to writedowns). In H1, 33.

• 2 P/S with 16% 5-year revenue CAGR and -8% 2-year revenue CAGR

• Has not produced any FCF in the last 2 years or LTM and burned through 74 million last half

• They have needed to raise 360 million PLN in the last 3 years. The reason why they paid 15 million PLN in dividends in the period eludes me.

• Net cash of about 60 million PLN

Strategy and present

PCF is a very typical tale in the industry, although it doesn't typically happen as a public company. The company has a few successes, they think they are on top of the world and go into more projects than they can manage (or finance). Then some fall through (like the agreement for Take-Two to publish one of their projects fell through in 2022, only to be fully discontinued a few months ago), some underperform (2021's Outriders, were the recoup for the publisher, Square Enix, was never fully covered) after exceeding what the publisher covered and the studio is left holding the bag.

Right now PCF is dealing with the aftermath of one of these periods, and there is not that much to say about their present. More than 90% of their revenue comes from publisher deals, but contrary to the approach in Bloober, they spend a lot more than that on the games.

Where is PCF going?

PCF burns 70+ million a half, and they have on hand about 83, of which about 60 are net cash. Which means they probably don't have a lot of runway despite the recent cancellation. They would need some release relatively fast, but their aim (high quality games with AAA publishers) does not match that well with that need. They have invested heavily (200 million PLN in intangibles in the balance sheet) in games in development, but they only have one project (codenamed Bison) slated for release in 2025, while the rest will have to wait until 2026+. And Bison seems to be one of the relatively smaller self-published projects, being a VR project. Prior VR projects include the VR version of Green Hell and Bulletstorm, not exactly best-sellers.

So it seems clear PCF is going toward another capital raise. Afterward… who knows. They seem to have the ability to produce decent games, but not in a budget adequate to their potential. Will be keeping an eye on future announcements in case something with potential shows up… but after they get money to get some more runway.

Is it investable?

No, in my view. They need to raise more and cut expenses to be able to get out their exiting projects, and I am not confident they will offer a return, given the lack of IP in the studio to exploit.

CI Games

Once the pre-release hype for Lords of the Fallen (2023) went past, CI Games has suffered in the markets. Let's see how they have fared business-wise.

Valuation

• Market cap of 273m PLN with 51% free float (approx)8.

• 14.7 TTM PE. Again, talking about earnings CAGR is not very useful, as the earnings are extremely volatile. Their record year was 2021, and 2023 was also good, matching the releases of Sniper Ghost and LotF games, while other years have been much lighter. But they don't make a loss since 2019

• 0.97 P/S with 61.9% 5-year revenue CAGR and 52.7% 2-year revenue CAGR, greatly affected by the last year coinciding with LotF release, H2 2024 should be softer.

• Has not produced any FCF in the last 2 years or LTM. They report profits because they capitalize a lot (80+ million a year)

• They haven't issued stock since 2020. It's something, I guess!

• Net debt of about 33 million PLN

Strategy and present

CI Games has managed to grow their sales very well, but has invested heavily in growth. It is a somewhat similar story to the two ones before, where the company had successes and launched into a big expansion that is now having a bit of trouble funding. In appearance, it is a bit more similar to Bloober in that they probably don't face existential risks, as they burned about 10 million PLN last year, and they were able to produce FCF pre-2022. But the cover of a book can deceive you.

They have been investing heavily in games and they have 160 million PLN in the balance sheet, of which 75 belong to already developed games (which is a bit aggressive for my liking, but still, they generated almost 60 million in sales last half from them.

Still, these are their plans for future launches

Nothing for 20259, except small published games. The last iteration of LotF probably damaged their reputation, as it got bad ratings (63.6% positive in Steam) and sold less than the prior iteration. Are more iterations by the same studio going to fix it? I don't know.

And they don't seem to have much else in reserve until 2027, and are already loaded with debt and burning cash.

Where is CI Games going?

Seems likely that they are going to raise capital again. They have an agreement with Epic to publish the new LotF, which has been touted as a major investment, but the terms are not known. Might be enough to keep a raise at bay, but I find it unlikely. Plus, if it becomes an epic exclusive, this comes from sales they will lose from not being in Steam.

Then again, toward 2026 it might be interesting if LotF picks up hype and they have already raised, or toward 2027, with the new Sniper Ghost release. But they are going to have an acute decline in revenues in H2 and in 2025, and still have to support the development costs of the projects they have.

Is it investable?

Go read what I said of PCF. Pretty much the same. So no.

Creepy Jar

Green Hell creators Creepy Jar are a rare company. They self-publish as indies. They focus on a project at a time. They don't have a subpar publishing brand. They have used the Green Hell money to focus on StarRupture while milking it with good patches, content, and a related VR game. Let's look under the hood.

Valuation

• Market cap of 205 PLN with either 68% free float or 47% free float, depending on if you count two funds that have big chunks of the capital… but for them it is a relatively small part of the portfolio.

• 18.8 TTM PE with 47.9% 5-year earnings CAGR and -20.6% 2-year earnings CAGR

• 6.3 P/S with 51.7% 5-year revenue CAGR and -9.8% 2-year revenue CAGR

• 20 x TTM FCF or whereabouts with 111 million PLN generated cumulatively in the last 5 full FY (vs 106 million in earnings)

• They have distributed 42.5 million in dividends in that same period (and a bit extra in the current FY)

• Net cash of about 75 million PLN

Strategy and present

Creepy Jar is very atypical among the companies we are seeing in the sector. No mad dash for expansion. Nothing of the sort. They had a successful launch back in 2020 (well, early access in 2019) with Green Hell, and have been able, through content expansions and well managed promotions, to keep decent revenues for 4 years. And since they have not done a mad expansion, they have kept profiting handsomely, keeping margins almost as good as PlayWay's.

They have been able to do this following a strategy of periodical free content updates for Green Hell (20 as of Q1) and doing great in terms of promoting it. Seriously, this sales curve is extremely uncommon in games, perhaps similar only to the most popular Paradox games as they get content.

So obviously, I admire them. Their next game will be StarRupture, of which we know it will be a futuristic base building game, but not much else. Not even a release date.

Where is Creepy Jar going?

Creepy Jar has managed to stay profitable every single year since the early access of their first and only game, and they have managed to keep a small size and build a really decent image.

Even if StarRupture was to be a failure (and there is not a lot of hype around it given the lack of info and a release date, so it is possible) they can probably still get some more FCF out of Green Hell, and they have enough of a reserve to last 2-3 years at their current clip of expenses, although their glacial speed of release would mean problems anyway (StarRupture is in development since 2019, reportedly).

Is it investable?

I think so. There is no guarantee of success for StarRupture and no date yet. That said, they recently revealed a gameplay trailer, so I would be surprised if we don't have a date soon (ish). And they have proven to be pretty careful stewards of capital and the studio, and have almost half the market cap in cash (and still generating).

If StarRupture fails absolutely terribly, it will drop, but it has the backstop of Green Hell cash generation and the cash on hand. If it does ok, they will be just fine, and if it blows up, this will multiply.

For me, the clear surprise of this set (I have to confess I had not looked at it before the article!). I don't have a position at the time of writing this, but I might build one.

Artifex Mundi

Valuation

• Market cap of 164 PLN with 59% free float.

• 6.7 TTM PE with 38% 2-year earnings CAGR (5 years ago they were losing money)

• 1.61 P/S with 32.6% 5-year revenue CAGR and 45.28% 2-year revenue CAGR

• 20.5 x TTM FCF with 20.45 million PLN generated cumulatively in the last 5 full FY (vs 44 million in earnings)

• Not much history of capital allocation, but they are repurchasing shares currently. There has been recent activity from insiders, with some purchasing shares, and others selling, with the overall result being an increase of insider ownership.

• Net cash of about 20 million PLN

Strategy and present

Artifex Mundi is a developer of small games. Don't expect great releases or anything like that. They do puzzle games (well, hidden object games) and small RPGs, mainly for mobile (but also for Switch and some make it to PC). Their main source of revenue is Unsolved, and they have been updating and promoting that game since 2019, with good results.

What happened in 2023 for the game to gain so much traction? Well, one obvious answer is increased investment. But the more full answer is that they started a big push of content to the mobile version10 then, and took the opportunity to increase marketing spend… and it worked. 2024 has been really good, but growth seems to be stalling.

All their other games are losing revenue though. They have a new RPG in development with relatively high budget for them (22 million capitalized as of Q1) and several other projects ongoing (which they capitalise, so the poor cash conversion is probably just accounting profit being overstated)

Where is Artifex Mundi going?

To release and pray, when the big RPG project is ready. Unsolved has clearly stalled, and the other games are not working out excessively well (they do earn money, just not much), and are in decline. So to improve their current level of profitability (overstated, I would go with FCF in this case) they need new releases not far into the future. Since they haven't disclosed much about the new RPG, I don't have any idea how it will go. But if we have to go by Bladebound's performance, I don't expect much.

It seems like the plan continues to be exploiting Unsolved to death (understandable) while they develop new property, with the RPG as their big bet.

Is it investable?

Maybe, but it looks relatively fully valued to me. If the RPG does well it is fantastic, but they have a good franchise with stalled growth and undisclosed projects in development… the biggest of which is a “big" RPG, an area where they haven't found success before. Not for me, but it is also nothing where I can say it is an absolutely clear pass, thanks to the monetization of Unsolvable (and the HOPA web games, to a smaller extent)

And well, that is all on Polish gaming company on my end. I hope you liked it, and please subscribe if you did!

From here onwards, it is just housekeeping!

What is going on in Dungeon Investing?

Let's talk about the survey (thanks again for answering!), the results that came out and what you can expect form this substack in the coming weeks. First, don't worry, I am not paywalling this for now (and in the event it comes, I will mention it with time to spare). Just wanted to understand what you wanted. So let's go over the questions

As you can see, the options were almost tied… so I will start with Square Enix, and probably will follow with the Anime sector guide. These things take a lot of time, so there will be other, lighter things in between. I also had some suggestions (deep dive of Nintendo, the board games industry, articles on how to value a company11). One suggestion (SEGA) surprised me a bit given we have this (which is maybe the best one I have written in my opinion, along with Cover Corp's). Maybe it was about an update but friend, if you had missed this one… I really hope you enjoy it!

I sort of knew no one wanted to read me waxing poetic about Hornby PLC (not saying it is a good investment!), but it surprised me to see the proportion interested in tabletop. I might have to think about Asmodee and how the Kickstarter market has evolved. But there are not that many companies12.

Unless you want me to write about Hasbro. Which may happen eventually, but I want to get out of the way the ones I mentioned above first!

I will probably write more about anime and manga (and adjacent areas) than most respondents seem to want. I just think there is quite a bit of value in there (and Sony seems to think that too, I don't think they want Kadokawa because of From Software). Apologies in advance, and I will try not to have other topics in between, but fair warning in case you don't like the topic!

There were a few “Games Workshop" in the suggestion box. I have noticed there is a spike in visits whenever I cover it, I love the company and it is a relevant part of my portfolio. I probably will only do updates like I do now, and not another in-depth piece (already did one back in 2018, and a very good one came out in Edge recently). That said, I will continue to cover the company and the changes it happens to go through!

Here almost everyone is in agreement. You want more company deep dives. They are fun to write, so nothing against it! But they do take a lot of time, so expect them to have other things in between (shorter articles with news and result updates, mostly). I will probably not invest that much time in market guides though, seeing the preferences (as they are equally time consuming). Thank for the insight!

And last but not least, thank you all for all the positive comments! It was really, really nice to read both the positive comments and the suggestions. If you want to chat about an idea (of the ones that you sent there or others), you can reach out:

• Through DMs in Substack

• Through DMs in X/Twitter

• Through DMs in Bluesky

• Through e-mail at trampasalpokerblog@gmail.com (legacy of my olden days as a blogger in Spanish)

Thanks a lot for the responses, and thanks for reading!

The fact that it is essentially a CD Projekt Red tracker (80% of the index currently) is pretty obvious in those numbers. But it is not the only component of the basket, and not the only component that has gone down. Zofia Gambetti has been tracking the sector performance for a while with less lopsided basket and well… results are also pretty terrible. So much so that she ended tracking back in September.

As any value investor would tell you, this is the right time to get involved and buy everything there! Or at least, have a look to see if anyone can recover. Let's start with the WIG-gry composition, to see if it can act as a guide. These are the biggest holdings

If you know anything about the sector, you might wonder why on Earth 11Bit, Huuuge and Ten Square are ahead of PlayWay in weight, while its market cap is way bigger. Well, PlayWay has owners, and only 18% of the shares are free float. Not the case for almost everyone else on this list! Let's have a look one by one to see if it is interesting. But, what questions will we be asking each of these companies?

• First, basic numbers, looking at the recent past. What is the valuation, are they growing?

• Second, the present, how do they work? Maybe they create major IPs, maybe they create AA games, maybe they do very cheap games and just see what sticks to the wall… Just so you know, I think is right with his content-distribution pendulum (go read it!), and what that means right now is that only content that is either of incredible quality, caters to a very specific and well defined audience or has production cost advantages is well positioned, and that is the framework I will be using.

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  The Play Pendulum

  The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen…

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  2 years ago · 38 likes · 4 comments · SuperJoost

• Third, the future. Any major known changes or releases coming up?

Let's get to it and go through 10 of these companies. Today I’ll go through the first five (CD Projekt, PlayWay, Huuuge, 11 Bit, Ten Square) and we will look at the other five (Bloober Team, PCF Group, CI Games, Creepy Jar and Artifex Mundi) in a second.

CD Projekt Red

Of The Witcher and Cyberpunk fame, it is arguably one of the most written-about Polish companies, up there with Dino Polska, Allegro, InPost… although there used to be far more written about it when it was doing new ATHs non-stop in 2018-2020, before Cyberpunk 2077's release. That said, there are long form analysis out there, like this one by 1 that go much deeper than I will here.

Valuation

• Market cap of 16B PLN with 70% free float (approx)

• 28.5 TTM PE with 34.5% 5-year earnings CAGR and 52% 2-year earnings CAGR

• 12.1 P/S with 18.7% 5-year revenue CAGR and 17.7% 2-year revenue CAGR

• 48 P/FCF with 1.7B PLN generated cumulatively in the last 5 full FY (vs 2.4B in earnings)

• 0.8B PLN paid as dividends in the last 5 years, 0.3B PLN dedicated to buybacks in the last 5 years

• Net cash of about 1.2B PLN (considering all bond investments, including the ones classified as non-current assets)

What this tells is first that the firm has shown significant operating leverage and has fantastic margins (look at that P/S vs PE). Their LTM 42% net income margin is incredible. But part of the story is lost here. Their best year was 2020, where they did about double the money than in the last twelve months (their second best year). Not only that, but 2015 and 2016 were much better than the following ones, and indeed better than 2021. So this is as lumpy as it gets, and 5 years ago it was a particularly low time for the company. Always profitable though!

Another thing that we can see is that cash conversion is not terrible, with 70% of earnings going to FCF (including all investments needed for growth). But still, in the last 5 years it has generated only 10% of the market cap in cash (most of it returned through buybacks and dividends, no M&A spree here). Cash conversion has been a bit less good in the last few years as the investment in new projects surpassed amortization. Someone could argue that's growth CAPEX but I am not that person.

The long and short of it is this: As an investor, I need CD Projekt to grow meaningfully while demonstrating continued operating leverage (or at least not lose margin). So far, it has operated in a sort of step function. The Witcher 3 was a relevant step, then revenue/profits declined steadily until Cyberpunk 2077 was released 5 years later. The release was bumpy, but the release of the Phantom Liberty DLC in Q3 2023 solved most of the problems. It also means from Q3 2024 onwards we will stop seeing growth for a bit. Will it be there in the future?

Strategy and present

As I mentioned, their present is mostly selling Cyberpunk 2077 and its DLC. And they are doing well, it is a fantastic IP that has spawned anime and tabletop games already. The same could be said for The Witcher's games2, which spawned the Netflix series. What I'm trying to say is that they are mostly in the business of creating AAA IP that they can hold and lever into further games and other products. That has earned them a considerable fanbase, and they have managed to create two of the most successful franchises in videogames. Definitely a good strategy, if they can keep up the good work with relatively limited increase in expenses, as they have done so far. Because I would say that what sets them apart from many other in the industry is that they haven't gone off the rails with growth. They are still focused in getting a few, very few, games right.

Aside from that, they also have GOG.com, sort of a Steam competitor in gaming distribution3. It is not all that relevant to the business (last year it provided about 2% of the operating profits) nowadays, but provides a small stable cushion if things don't go as well in the gaming release side of things. They have also managed to grow steadily4, but all in all, something that we can ignore.

So we have a company focused on offering very few games of very high quality with solid franchises and a fanbase. Success in this area is a huge prize (see Rockstar!) but more often than not studios falter before reaching anything close to that (Bethesda, the old Blizzard… the list is really too long to count).

Where is CD Projekt going?

They seem to be trying to increase the number of projects ongoing, and they are opening a new studio. In Boston, no less! That will help them realize an ambitious roadmap that includes:

• Cyberpunk 25, developed mostly in the Boston studio.

• A new Witcher trilogy, developed internally in the original studios, and that is aimed to be released with 2 years between each game. We don't know when the first will be released though!

• The Witcher remake, developed externally by Fool's Theory6.

• Another game in the Witcher universe focused on survival developed by The Molasses Flood (acquired in 2021 and also based in Boston) that has, rumor has it, been rebooted once already, and it is supposed to offer multiplayer (maybe an service game experience)

• A new unveiled IP in the works, internally, since 2021.

That is, CD Projekt is diverging from their classical strategy of focusing on very, very few projects7 at an extremely high level of quality. They are now developing 7 games across 5 lines of work, 4 of them internally. At the same time they have expanded their footprint both through M&A and studios.

Aside from that, they are also migrating to Unreal Engine from their own internal tools. That will effectively make it easier to find and onboard new developers, and also maybe reduce support work. While some people see this move as potentially saving costs and improving margin… I see it more as table stakes, and not worsening. But still, necessary.

This is clearly an investment cycle that has not yielded its intended results yet, so it can clearly produce the growth that we need for this story to work. Will it? That is a bit more uncertain. Studios expanding have a difficult story, and the new studios in another location examples that come to mind (CA Sofia, Paradox Tinto) haven't worked out that well or needed time to work out the kinks in the system. And if they don't work out well, this will result in both expenses inflation and brand dilution. The good thing is that CD Projekt direction has Cyberpunk 2077's release in recent memory, so they know the price to pay if what they get out is less than perfect.

Is it investable?

Success depends on them coming out of this investment cycle well. In my view, the equity already reflects some changes, but not unbridled optimism as it did prior to Cyberpunk 2077 release. Partly because there are no release dates for anything I just mentioned, as far as I know (although rumour has it that 2025 should see at least the Witcher survival game out, then in 2026 the first game of the new Witcher trilogy). Partly because of what happened with Cyberpunk itself.

Let's suppose things work out and they are able to deliver 2020 level of results on a normalized basis, with decent growth too coming from the accumulation of back-catalog and that leaves us at… well, it is 7% of their current market cap in earnings yield. Say it is growing at double digit and consider that a 5% earnings yield is fair. For me, it doesn't cut it. But if they manage to get a service game going really well, or if the multiple gets high enough, it can work well. And in this case, the multiple can get high because it is perceived as a quality company and is also well-known as a product among investors. There is also the chance they get to GTA's levels of greatness. But overall, it is priced for relevant growth and it happening rests on them executing well. Certainly a good company, and one I would invest in if growth was not priced in. But I missed the boat a few months ago. Oh well!

PlayWay

Yes, it is the 5th in size in the index, but really the second in size in the market. Let's get it out of the way, it will be quick!

Valuation

• Market cap of 1.9B PLN with 18% free float (approx)

• 14.5 TTM PE with 17.6% 5-year earnings CAGR and -8.6% 2-year earnings CAGR

• 11.3 TTM Market cap / Operating profit with 26.22% 5-year Operating profit CAGR and 1.8% 2-year operating profit CAGR (included because I think it explains better how the business is going in this place)

• 6.4 P/S with 30.6% 5-year revenue CAGR and 8% 2-year revenue CAGR

• 12.1 P/FCF with 0.46B PLN generated cumulatively in the last 5 full FY (vs 0.63B in earnings)

• 0.53B PLN paid as dividends in the last 5 full financial years (0.65 if we take into account the current financial year and remove 2019)

• Net cash of about 0.2B PLN

So wait, they have grown sales a lot more than earnings? There had to be a reason why this was so optically cheap, right? Well, as everything with this group, it is complicated. Earnings numbers are muddled with the sale of subsidiaries, both at a profit and at a loss. In operating terms, 22 was their best year so far, but 24 is probably going to close better (H1 was 11% higher than H1 22). Still, growth has not been impressive in the last couple of years, hence the multiple. Capital allocation in the form of dividends is essentially a must given the low free float. The high amount of dividends vs FCF might look worrying, but that is because in the FCF calculation I am not including either purchases or sales of subsidiaries. PlayWay's cash balance has also increased along the way.

So this is a very profitable company, with higher margins than CR Projekt even (or pretty much any other competitor), but that seems to face growth challenges in the last few years.

Strategy and present

I have discussed PlayWay's strategy other times, but the TL;DR is: produce games as cheaply as possible as long as they garner some interest, get them out, see what sticks, be ruthless about costs. They do that both through internal development and by financing tiny studios, many times by getting a sizable stake in them. Many of them fail, but enough go well to make the business exceptionally profitable.

They have had 2 really relevant franchises (House Flipper, Car Mechanic Simulator) and some other relatively successful titles (Thief Simulator, Contraband Police, Infection Free Zone, Crime Scene Cleaner…). As successes go, they are relatively modest (House Flipper, the biggest so far, has sold around 3-4 million copies and at far from AAA price, averaging maybe 15$), but given the cost base, it is extremely asimetric.

They rely on the one or two successes they get pretty much every year, plus the host of other profitable games they put out (Ship Graveyard, Gunsmith Simulator…) and the relatively stable sales from their two main series. Their catalog has been increasingly contributing to that, as titles like Contraband Police go in there.

Where is PlayWay going?

They are mostly doing the same, but at a bigger scale. They are also bringing international developers into the fold, collaborating now with Turkish and Indonesian developers, while the majority are still Polish. And also making forays in mobile. The summary is lots and lots of bets with a good balance without betting the house anywhere, even in the main franchises.

Is it investable?

In my view, yes, and as I have disclosed in the past it is one of my positions. It is cheap enough that the downside is limited, and I don't see their discipline with costs eroding as long as the current CEO is there. And despite the hiccups in 23, content for House Flipper 2 plus the new iteration of Car Mechanic Simulator plus a bunch of other bets maturing should should yield enough growth. Don't expect high multiple though. It might happen (has in the past), but it is much harder to get high quality ratings in a publisher that does a lot of cheap games, rather than a couple of AA/AAA, despite the business being better. But it is priced for no growth, which is I think wrong. More details here:

Huuuge Inc

Mobile F2P galore, with the customary in-game charges and publicity. Currently the third in market cap after 11 bit's recent debacle

Valuation

• Market cap of 0.94B PLN with 61% free float (approx).

• 3.7 TTM PE. CAGR here does not apply, as they were losing money 2 years ago and the profits 5 years ago were ridiculous

• 0.87 P/S with 3.7% 5-year revenue CAGR and -12.9% 2-year revenue CAGR

• 3.17 P/FCF with 0.21B $ generated cumulatively in the last 5 full FY (vs 29 million in earnings)

• 0.24B $ used to repurchase stock in the last 5 full financial years - but they did issue 0.17B in stock meanwhile. To be fair, they have repurchased at a lower price… but mostly with the issuance money.

• Net cash of about 0.1B $ or 0.4B PLN

Oh boy. A melting ice cube.

Strategy and present

Huuuge Inc found success years ago with two F2P games, Huuuge Casino and Billionaire Casino, that you can use both from web and facebook and on mobile. These are casual games, mostly slot machine emulators, and you get prizes in the virtual currency of the game, and you need them to play more rounds. Classic time and money wasters. They have been up since 2015, and the company has not managed to get any new properties going, with these games representing 97% of the revenue in H1. The company benefited from the COVID high, as everyone else in the industry, and did peak revenues in 2021. Since then, they have been losing revenue at a good pace, but huuuge8 efficiency efforts, slashing SG&A in half, saw them turn a profit.

Where is Huuuge going?

Down the drain, most likely. They have not been able to find new properties in a decade and they have probably hit bone in the cuts to expenses they can make, and competition is though in their space. They can be profitable for a couple of years more, or they can keep revenues stable for a couple of years more, but most likely not both due to customer acquisition costs. They have been using their earnings and cash from the 2021 raise to fund repurchases to sustain the share price… which has taken a huuuge9 nosedive since they ended back in April. Their most recent data puts bookings going down 19% YoY in Q3, which shows the decline is accelerating (probably as CAC is more limited to try to squeeze a bit more profit).

Is it investable?

See, they did generate 13% of the current market cap in cash last half, and have more than 40% of it in cash as well. But with 19% YoY revenue declines and no replacement in sight, I wouldn't buy this if it is not in net-net territory. I would actually consider it for shorting if it was available for that in any of my brokers (not the case, sadly). Not going to go for a declining company that promotes itself like this.

Of course, where they to find another property that worked out as well as those games (which, again, they have been trying for almost a decade now), this would become a homerun.

11 Bit Studios

Frostpunk creators. They have had a rough patch of late with Frostpunk 2 and The Thaumaturge, let's see how it is going.

Valuation

• Market cap of 650 million PLN with 83% free float (approx).

• They had loses in the last twelve months, so no PE.

• 11.3 P/S with -8.7% 5-year revenue CAGR and -13% 2-year revenue CAGR

• Negative free cash flow in the last 2 years, with 22.6 million PLN of negative FCF in the last 12 months

• Net cash of about 20 million PLN

In other words, you have to believe in them as a turnaround play, given they are losing money. Let's understand why looking at their recent past.

Strategy and present

11 Bit released (as in developed and published) a successful game, This War of Mine, in 2014. Then they followed up with the fantastically well received game Frostpunk back in 2018. The funny thing is that being well received is about the only thing they have in common, being in completely different genres (survival vs. RTS). 11 bit has also acted as a publisher of relatively minor games, but has found only moderate success there so far (with Children of Morta and Moonlighter being their best performers, I think).

After those initial successes, 11 Bit has struggled to find follow-ups. They managed to keep their revenue at decent numbers while they invested in three main areas:

• New games of other studios to publish, especially in the AA space. The most relevant (The Invincible, The Thaumaturge, Indika) came out in the last 12 months

• Frostpunk 2, a direct continuation of the first one

• The Alters, continuing the studio survival games tradition

As you can see, the studio doesn't have a particular focus in one type of public, publishing and developing several types of games (adventure, survival, horror, RTS). They also fall in the middle ground, with decent budgets but not quite at AAA level.

Not a good space to be right now. All the published titles they have released from other studios have had decent reviews, but have failed to sell much. Both The Invincible and The Thaumaturge have resulted in losses so far, not recovering their cost. Indika did, because it had lower budget, but was not a particularly well sold game (hovering around 100k copies).

All this failures after investing for years left the survival of the company in the hand of the two internal projects, Frostpunk 2 and The Alters. Frostpunk 2 covered its costs10, but it is far from the level of success of the first one and probably can't sustain the company through another investment period. And The Alters is not charting particularly well in terms of hype.

Where is 11 Bit going?

Difficult to tell. Frostpunk 2 will add to their formerly cash reserves. Maybe 40-50 million PLN. They did burn about 10 million in H1 despite the releases, and they will need to keep investing in new games. They have The Alters and another unrevealed project still ongoing, both to be released in 2025 (after The Alters was delayed, it was supposed to be Q4 2024).

It is tough. The combined lifetime revenues coming from Frostpunk 1 and This War of Mine until June 2024 were 370 million PLN. They have spent already all of that, and the results have been mediocre, and they would have to surpass their biggest successes to return the investment. They have The Alters, another project, and other 60-70 million to get a second lease on life (and a big chunk of that will get spent in the others). It is hard to see how they can avoid downsizing at this point, unless both projects do well.

Well, that, and The Witcher remake. See, as part of the investment in The Thaumaturge, they did get 40% of Fool's Theory on the cheap, as that is the studio that developed it. As luck had it, the remake deal was not closed (or at least disclosed) until months after the investment. At this point, maybe that, and their participation in the remake of The Witcher, is worth as much as the rest of the company (although the conditions are probably heavily slanted toward CD Projekt… as they should). Still, it is a minority investment, and I don't know if they will be able to funnel cash to dividends, that they might need.

Is it investable?

At this point, not for me. The market cap is a bit high for the level of catalogue sales and the performance of Frostpunk 2, and the conditions on the remake are certain to be favourable to CD Projekt. But I would keep The Alters under close watch. If interest picks up or if it fails and the stock goes down enough, this can get really interesting (thanks to the Witcher remake optionality).

Ten Square Games

Casual mobile games with social features for retention purposes. They have suffered in the last couple of years, as many other actors in the sector. Will they find a comeback?

Valuation

• Market cap of 520 million PLN with 70% free float (approx).

• 8.6 PE with -16% 5-year EPS CAGR and -67% 2-year EPS CAGR

• 1.26 P/S with 30.5% 5-year revenue CAGR and -17% 2-year revenue CAGR

• 4.6 P/FCF with 638 million PLN generated cumulatively in the last 5 full FY (vs 435 million in earnings)

• In the last 5 years, 251 million in dividends. Plus, they ran a 114 share repurchase this year (although it was ran as a tender, and management sold part of their stake there, at a price 50% higher than the current one)

• Net cash of about 80 million PLN

This is a strange combination of metrics, but it has its explanation. As a COVID winner, they grew a lot, and earned a lot more too, expanding the business as a consequence. Then, post-covid hit and earnings fell. A lot. But in the last half they have changed size a bit and are already getting better numbers. As for their outlandish cash conversion, well, customers finance them by paying for their in-game currencies well in advance of when they use them. Unearned revenue is the bulk of their liabilities.

Strategy and present

Ten Square is a developer of mobile games, and earns most of its money form Fishing Clash (2017) and Hunting Clash (2020), with a new game, Wings of Heroes, slowly gaining relevance in the mix. The Clash games are losing ground, with Fishing losing about 10% of revenues YoY according to Q3 provisional booking numbers, and Hunting about 15% (ouch). But Wings of Heroes did a 3x in a year, and is 60% up from last quarter. It is only 5.5% of revenues so far, sadly, so it has to grow a lot more to make up for the others. All of them invest heavily on marketing, with more than 30% of revenues for both hunting and wings going there (with very different results!). Fishing only dedicates 18% of revenues for that, and still churns more slowly than hunting (and is much bigger already)

The dynamic of the games is very close to gacha games, in that you are using currency to get opportunities and better probabilities to fish or hunt animals to add to your collection. They do have some social element to try to avoid churn, but that's the essence of it.

Aside form Wings of Heroes, they are also developing other 2 games that hopefully can contribute in the future. But Ten Square doesn't spend extremely heavily on development. Their main cost centers are CAC to compensate for churn and live operations.

Where is Ten Square going?

Ten Square has managed to cut costs and is fairly profitable for the revenue it has. Given their prior scale, they might be able to operate even with a bit less expense. But long term, they need to stop the revenue bleed. The good news is that they have already have a game with momentum (Wings) and two prototypes. Plus, the combined revenue decline (around 10% YoY) is much less terrible than in Huuuge. This has far better chances of surviving, either through new games or good operations in the current ones.

Is it investable?

It generated a fifth of their current market cap in the last twelve months, but for something with declining revenue, I need to see even more. If the revenue gets stable or close to, this is one to watch, though!

A bit of housekeeping

As some of you are aware, I have been running a survey to try to gauge what types of articles can be more useful for you. It is only 4 questions, and it would be super useful for me if you can answer them. Thank you in advance!

Start Survey

• FESBAL (Spanish Federation of Food Banks) is gathering resources to support the food banks in the regions affected by the floods. It is the option I have gone for, personally.

• Cáritas (an NGO linked to the Catholic Church) is also actively participating in the relief effort and receiving donations as well

• There are several more options gathered in this notion, in case you prefer to look more.

Thank you.

Cover Corp

Last week I published an analysis on Cover Corp, a vtuber talent agency. Since then, it has gone up about 40%, so I thought it was worth revisiting what has happened to make it pop this much (other than you all bidding on it, of course!). To be clear, I still think it is cheap and has multibagger potential, despite the jump in price. You can also read (or re-read) the original article if you want!

A few hours after releasing the post Cover released an updated H1 guidance (H1 finished a month ago, so we can talk really about a results release ahead of time). 14% up in revenue, 30% in operating profit, and 14% in net profit. What we see here is first a nice bit of operating leverage and then… why is the net profit so low?

The guidance includes an extraordinary provision of 450 million yen (about $3 million) because they didn’t charge sales tax in some transactions in the US and now they have to cover it. This is an 8-year-old company that has started operating more seriously outside of the country fairly recently. It is a bad look, but in a young company that has multiplied by 5 is revenues in the last 3 years… well, let’s just say if you ever worked in one you probably have seen similar stuff. Of course, most companies go through this while they are private.

Anyway, this means they did 2.2B yen in operating profit in Q2, on about 10B yen in revenue. Close to the numbers in their last Q4 (which ends in March). Since Cover has pretty strong seasonality and beating Q4 of prior year is pretty hard (last year only Q4 of last year did it) those are incredible news

One day later, Morgan Stanley initiated coverage of the company with a price target that is basically double of the current one (3900 yen). And that made the stock pop a bit more. This one I heard from Thomas over at !

And then, on Friday, Cover announced a few new collaborations (aka brand advertisements) in Indonesia and Japan and a project to improve their… live virtual performances? I am intrigued by the project, but the collaborations are what really shows the strenght their vtubers have as influencers.

Toei Animation (and Bandai Namco!)

Toei reported earnings properly, not in some measly advance… and I am going to quote myself, as tacky as that is. Back in May I said this:

Their results so far? 20% up. And an updated forecast for the year that is 4% up rather than the 20% down in the guidance… but I think going to be surpassed. The new forecast assumes that H2 is going to be 6% better (in profits) than originally forecasted. For that, profits would have to be 40% lower than in H1, and 14% lower than last year.

And this still doesn’t take into account Dragon Ball Daima, which premiered recently, and Dragon Ball Sparking! Zero, which will probably leave a decent chunk of cash in royalties given the Bandai Namco game sold 3 million units in its first day (counting presales, of course, which given it had advanced access is kinda cheating… but I don’t mind). So if those releases are not driving the earnings, what is? Mostly overseas royalties for both animation and other products from both One Piece and Dragon Ball selling like hot cakes (well, or streaming, I guess?)

Domestic licensing for Dragon Ball is also doing record numbers. Toei is doing just fine. It has gotten a bit more pricey though, going up about 50% from the June lows, at about 34x LTM earnings. Top notch assets with a good history and good plans to keep up the printing machine going with Dragon Ball and One Piece. They have really struggled to find decent new IP, with Pretty Cure being the last relevant one, and that only domestically. It launched in 2004. Toei Company no longer trades at a discount, but at a slight premium of its stake, but not enough for a pair trade (reverse of the one discussed here int he past)

As an aside, the real protagonist here is Bandai Namco. Who sells all those toys that pay royalties to Toei? Who did recently announce a pretty impressive forecast update? And last but not least, who released a Dragon Ball hit game? Bandai Namco revised upwards their annual estimates by 36%, citing mostly Elden Ring and the toy segment sales in Q2 (up until September). Granted, the original forecast was pretty gloomy, and the 10% YoY in earnings the revised forecast promises is not that fantastic. Still, a decent change from last year, and might warrant a deeper look (the stock has been flat for the last 4 years)

Games Workshop

As you know, I have a bit of an unhealthy obsession with Games Workshop’s levels of inventory and SKUs. So let’s see what has been happening with their SKUs during the year…

A 5% drop in available SKUs in the online store, and more or less consistent over time. That despite the new AoS edition launch and The Old World increase in range. At the same time, stocks keep improving, especially in the US, but also in Europe outside of Horus Heresy and Middle Earth, which are pretty niche.

The inventory improvement comes in part from the removal of SKUs, but not exclusively. In general, I think a smaller rotating range and good stock coverage will help Games Workshop sell more, so I hope they are going in that direction!

The truly interesting stuff is, however, in mobile gaming. I have also been tracking how well Tacticus does, being the main Warhammer 40k mobile game, and to say the Space Marine 2 release has been a boon is very conservative.

Granted, it was already going decently well before. It was not the only side-effect of the success of the game. The first edition of the game has had a bit of a revival, Darktide is still above the pre-SM2 CCUs thanks to a good use of a discount campaign taking advantage of the tailwinds of the other game’s release. Rogue Trader also timed their DLC release pretty well to take advantage of the increased 40k buzz, and is also doing fairly well. In general, Space Marine 2’s success is lifting all other 40k games.

Sega Sammy: Turds and raisins

Sega Sammy's last few months have been a bit extreme. We have had a fantastic launch with Metaphor: ReFantazio. It sold really well for a JRPG and a seems a firm GOTY candidate2). The response in Steam (a platform where Atlus games don't sell that much) was stellar, almost doubling Atlus' previous record of CCU with P3R.

Sonic x Shadow Generations also launched fairly decently for a relatively minor title (it is a remaster of a 2011 game with an adventure for Shadow), with good reviews and sales, passing 1 million copies with ease. There was also the relative success of Yakuza Kiwami's switch port, which I think nobody expected, internally or externally.

But then… Football Manager 25 has been delayed until March, which means this year we won't have the typical 1 million copies coming from this series. The migration to Unity is going a bit slower than expected3, and the way it was handled (opening preorders for a release date 1 month in the future, then moving the release date back 5 months a week later) has damaged the credibility of the studio quite a bit. If they had not opened preorders and had set the initial date in March, it would have been bad, but not this much. Oh well, the franchise survived the CM4 transition, it will survive this.

On balance, I think it is net positive, especially since in the pachinko business the latest Fist of the North Star machine seems to have captured significant market share in Pachinko, rather than Pachislot. That said, Q2 is likely to be soft on the consumer side (expected since there were not many launches). Q3 should be the strong one this year!

Oh, and the Yakuza Amazon series? Let's just pretend it didn't happen. Everyone else is already doing it, anyway.

Other brief news

• Nihon-Falcom (3723.T) found another reason (celebrating the 20 years of the Trails games series) to issue a commemorative dividend for the second year in a row, doubling the ordinary dividend and bringing the yield to a whopping 2%. Given they have more than 80% of their market cap in cash, I consider that pretty stingy. That said, the 2025 remake of the most beloved entry in the series (Trails in the Sky) for Switch looks promising.

• Mandarake (2652.T) continues the trend of lackluster sales updates in the second half of the year that I discussed in the last quick update with only 9% growth in September. Seems like there is no quick recovery, sadly. We'll see in terms of profitability.

• Furyu (6238.T)'s last Q was not particularly great, with a drop in profits despite a very slight increment in revenue. Q2 seems similar. The merch/figures business (highlighted in the image) is growing, but only about 6% while purikura (the most profitable business) keeps shrinking slowly. Still think they can do much, much better on the figures business, but it might take time.

The difference between fictional characters and these celebrities was, I think, their responsiveness to their fanbase and the world in general. A fictional character is in a story, a game, an anime… whatever. But there is little responsiveness outside of that narrow area, and no real presence. We can feel closer to real-world celebrities, watching or reading their interviews, listening to the music they release or their new shows… and that makes for stronger relationships with them. Virtual celebrities are… something in between. And v-tubers are probably closer and more reactive than typical celebrities. And there, I think, lies there strength. But let's review a bit the history of virtual idols.

Virtual precursors

Of late we have seen the rise of virtual bands and idols. While we can see some very early cases (Alvin and the Chipmunks), maybe the closest precursors of the current trend are Gorillaz and Hatsune Miku. Gorillaz is a virtual band with fictional characters formed by Blur's singer and an artist that then had many different touring ensembles (and ways to present on stage). Both their aesthetics and sound clicked well with the times in the 00's, and had significant financial success. They were still heavily tied to a few real people and focused only on music so while their media and merchandise presence was strong it also faded relatively quickly. Hatsune Miku is a very different animal.

While also tied to music, Crypton Vocaloid characters are a lot more versatile. Vocaloid is just a software for synthetic singing coming from some pre-stablished patterns. While the software was owned by Yamaha, they licensed it for distribution to Crypton, and Crypton added a few characters to promote it… and the rest is history. While the other characters have not had nearly as much fame, Hatsune Miku has starred in lots of videogames, merchandise… anything that does not require a personality (by design). The scale is difficult to understand without numbers. Project Sekai: Colourful stage alone brings around $10m a month in revenue, according to Sensor Tower estimates1, and while that is probably the main revenue source in games, we can't forget the PlayStation ones, or the tons of money in merchandise.

But even with Miku all that was attempted was to have a mascot for the rhythm games and products, and some songs. What we are going to talk about here is a bit different. We are going to talk about V-tubers, and in particular, about Cover Corp, the talent agency behind some of the most successful ones.

Cover Corp by the numbers

Before talking about what Cover Corp does exactly, let's have a look at their growth and current valuation (as of June 24th 2024):

• Current Market cap: ¥96B

• Current Enterprise Value: ¥87B

• LTM PE: 23x

• Last year revenue growth: 47.5% (74% 3-year CAGR)

• Last year EPS increase: 65% (44.5% 3-year CAGR)

So yes, it is a bit pricey, but with this growth, it is arguably still cheap. That said, cash conversion last year was not great, with operating cash flow at roughly the same level as the previous one. But in FY23 WC variations were really positive for cash (netting almost ¥2B) and in FY24 they were negative (¥0.3B). Adjusting for that, it would be more than a 60% increase. FCF was pretty muted (¥1B in FY24) because they have been investing relatively heavily in both physical goods and intangibles. Still producing cash while investing for growth at this rate though.

So we see a business that is growing insanely fast, and that in the last two years has found relevant operating leverage, with earnings going 3.3x higher and revenue only 2.2x. Growth also barely decelerated last year, going from 49.7% in FY23 to 47.5% in FY24. Q4 FY24 was the slowest, at 43% growth YoY.

Their announced forecast is slower than that, sadly.

Only 20% revenue growth and 22% profit growth. For FY23 they initially guided 30% revenue growth, and for FY24 they guided 30%, then corrected to 39% in February and ended up beating it pretty handily in March. Depends on the company, but setting lowball guidance for the year is pretty typical in Japanese companies, at least in this space.

That said, they have already released their Q1 results and they are… not great. Especially disappointing is the relative lack of growth of merchandise income2. I think it is just a quarter that went sideways, but we'll have to keep close watch on it. Anyway, their streaming revenue (closest proxy of the revenue they could generate at full monetization, in my view) keeps growing well, while the corporate structure scales up to operate internationally in a bigger way.

What is a V-tuber?

So what is a V-tuber, and why are they generating that much money for a few Japanese3 companies? V-tubers are simply streamers that do their job behind a virtual avatar (animated and with expressions through mocap, and also with their voice modified in many cases). Hololive (the brand Cover Corp operates under) can be understood as a talent agency, similar to idol agencies in Japan and South Korea. They select talents, make groups with them, cross-promote them and commercialize the IP.

The streamers do live sessions, mostly gaming but also just running Q&A sessions or just sessions presenting new outfits for the avatars. The relationship with their fans is, in that regard, similar to the one other streamers have and as such it is a localised relationship (though not necessarily local). In some senses they are a bit more versatile than standard streamers. As the avatar is, in most cases, an anime-like character, animated content or music videos can be easier to produce, as is introduction in other audiovisual content (from anime series to videogames). As an example, Gawr Gura4 is one of the better known V-tubers in Hololive. This is what music video content looks like:

While live videos done with mocap look quite different both when it is mostly 2D based like this one (in which she showcases a Hatsune Miku game, funnily enough!)

Or a 3D one5

Each of the V-tubers has their own style (ones are snarkier, others are sweeter… a character for each preference!) and so have their own public… but there is also significant overlap, and that means cross-promotion works. V-tubers are, I think, far more responsive to their fans. Over time, it is common to have some changes in the persona driven by the inside jokes of the chat and lore of the avatar, generated in events and in streaming sessions. As such, the fandom of a v-tuber, while not usually massive, tends to be pretty loyal.

But… who watches this?

I know, I know. It is easy to get a bit weirded out by the concept of virtual anime girls on stream. Truth be told, it is not only anime girls, there are anime boys as well! Both Nijisanji (Anycolor) and Hololive have male V-Tubers, but Nijisanji seems to dominate in the male Vtuber space, while Hololive does the same in the female space.

In Japan, there seems to be space for Vtubers of both genders to be fairly successful, and Nijisanji has managed to get fairly good numbers focusing on male ones.

Outside of Japan, the market is mostly dominated by female streamers and I suspect there are more male fans, although demographics are difficult to come by. In general, male V-tubers have had a harder time in the west, and the main vtubers, even those of other origins (say Ironmouse) are anime girls.

I would say that we have several distinct markets really

• Japan: The craddle of the phenomenon. It skews younger, although in the male fandom there is a significant section above 30 (not in the female one though!). Far more widespread than in other countries, and also merchandise purchases of anime-adjacent content are more normalised.

• China: Really relevant for the initial vtubers, like Kizuna, and at the start of Hololive as well. I haven't found a demographic breakdown, but given the popular streamers, I guess it is also skewed to female vtubers. The main characteristic of this market is the difficulty to operate in it, which made Hololive abandon it in 2020, prioritizing the west, after a controversy regarding Taiwan6. It is still a sizable market where VirtualReal, a joint venture between Anycolor and Bilibili, is the main agency.

• Asia (ex-Japan and China): Mainly S. Korea, Indonesia and Thailand. Haven't found a demo breakdown, but seems similar to Japan, although at a much lower level of purchasing power (S. Korea aside).

• West: Content is mainly in English, although Cover is starting to produce content in other languages (namely German). Cover is the main agency operating here, and the public is more skewed toward males and seems to skew younger than in Japan.

So we have mainly young people, anime-subculture adjacent with a strong fanbase in Asia and a growing one in the west.

Why do people watch vtubers

Much like normal streamers, people watch them for entertainment and the content they create with game streaming, commentary programs and similar stuff, and that varies a lot by streamer. But while that is the starting point for the viewer, vtubers offer a different experience in terms of aesthetics and interaction.

In terms of aesthetics, including the behaviour, it is anime-adjacent, and depending on the v-tuber they index more to some anime tropes or others (In the case of Gawr Gura we see her go more toward a silly but cute character, others like Houshou Marine index more on the saucy side), and the English branches are usually less blatant with it. It is typical for a vtuber to adopt a persona that closely resembles some stereotypical characters in anime, which attracts viewers familiar and comfortable with those tropes. This is part of their strength (as most streamers do not offer content with those codes), but also a big barrier to entry, as they can be extremely cringey for people not very comfortable with that language. This effectively means their success will probably be related with the extension of anime-coded content7.

In terms of interaction, obviously you have the more common interactions in-stream, their charisma and the parasocial relations that form. While that is true for other streamers (and in many cases, celebrities) to an extent, it is probably more common in this area (you can check this video on it8). That aside, there is another relevant part of the equation here, which is the co-creation of the character. V-tubers avatars lore and behaviour typically evolves over time, based on the things that happen in the streams and interactions with the chat or other v-tubers, usually accentuating the characteristics that are deemed the most iconic for the character9. Some fans witness and participate of that evolution, and feel part owners of the success and evolution of the character in what the Chinese are deeming parakin relationships. For the smaller percentage of the fanbase that feels that way, retention is higher and obviously spend as well.

As you can expect, this correlates a bit with the darker aspects of idol culture and it has led to problems on occasion (when both male or female vtubers were rumored to have sentimental relationships and faced backlash for it), although the para-romantic relationship is not necessarily the main parasocial one for most fandoms in the v-tuber space, and the EN branches are typically less idol-like.

Can we expect the audience to grow?

Purchasing Cover here means underwriting a growth business, and one of the factors is the number of people in the general v-tuber audience (Cover capturing that growth is a different story!)

Streaming as such is relatively mature at this point, as are edited videos on YouTube. Sure, there is still growth, but we have seen streaming figures transition to the mainstream and vice-versa, and content produced without the backing on major networks or streaming services is a steady part of the content diet of most of us in audio (podcasts), video (YouTube) or written (Substack, and many others) form. Why would V-tubing still be a growth niche within that area?

First, I think the expansion of anime aesthetics outside of Japan is here to stay, which makes it less cringeworthy, so I think they will slowly get more accessible to the mainstream, while I very much doubt the part of the public which is into this now will merge back into the mainstream.

Second… I think the use of online avatars for content creation is going to get more popular, as it allows more freedom to the creator when it is clear and understood they are interpreting a persona. More freedom to the creator should mean that the frequency of them hitting the right spot could be higher, but also that more creators will experiment with avatars as they get cheaper and easier to use. Then the agencies can pick and choose and launch the ones that do well, as this is effectively a distribution issue, as we will see later. That should drive the increase in content quality and cause audience growth. This, though, is just elucubration on my part.

So overall, yes, I think we should see the audience grow (although as everything else on the internet, COVID pulled growth forward quite a bit). That said, some minor agencies have closed recently, and Anycolor streaming revenue is seeing a pullback (IMHO of their own doing), so something to watch closely.

Why an agency?

Being a V-tuber has very low barriers to entry, as being a streamer (or any kind of content creator really). So V-tubers will pop up everywhere unsupported and some will make it, and the market is saturated at this point, meaning making room for a new v-tuber is hard, much harder than it was 4-5 years ago.

The agencies already have an audience, or rather two. First you have the people that is cued in to the agency in particular because they like their style (one could say Yagoo, Cover Corp's CEO, has his own fans). Second, you have the audience of the already existing V-tubers, that you can use to cross-promote the new ones. That allows a V-tuber channel to get economically viable pretty fast. For example, Cover had 4 debuts 4 months ago, the ones of Hololive Justice. The 4 V-tubers now have 1.4m subscribers in Youtube (combined). That would make it a top 30 brand on its own according to vstats’ rank (6 of them belong to Cover and 2 to Anycolor). Very few v-tubers achieve those numbers ever, much less in 4 months. Basically, in a saturated market whomever controls the distribution has the advantage, and the big agencies do. It does not mean an independent can't get there, but it is an uphill battle. In other content-creation areas it is far more difficult to become a middleman but here there is a common thread for all the fans regardless of the exact content they want to consume, the aesthetics, which gives the agencies the ability to be curators with staying power.

That aside, having an agency allows for easier access to merch production, possibilities to participate in events and of releasing higher production value music videos or other avenues to use the IP (brand advertisement, anime, videogames…)

The downside, for the creators, is that the agencies own the IP of the character a retain a substantial part of the revenue generated. Cover is one of the most generous ones, and only 15% of revenues went to pay the talents, with a gross profit (inclusive of other costs) of slightly above 50%. But 15% of a lot is more than 50% of almost nothing!

The business model of the v-tuber industry

Vtubers in general have 4 sources of revenue, although most of them do not exploit all of them. First, there is content revenue. Fans send gifts in whatever form the platform uses (superchats in YouTube, for example). Additionally there can be branded content on stream (for example, some companies paying for their games to be played on stream) and, of course, we have ad revenues and music royalties. It is also the base for everything else, and an indicator of well things are going in terms of fan acquisition.

Then we have merchandising. Plushies, figures, pillows… you name it. As with idols or anime characters, anything can wear the face of your favorite V-tuber.

We could have grouped the above into IP and licensing, but it is too relevant for that. Let's leave IP and licensing for other areas, like videogames and licensing of skins for other games or content (as opposed to content produced by the vtubers and their company).

Last but not least, events, like IRL concerts, are a surprisingly relevant for large productions

I want to go in detail on how Cover manages each area, but first there is an important aside.

Who owns the IP and what can they do with it?

In the case of V-tubers that work with an agency like Cover, the IP belongs to the agency, but that doesn't mean they can do anything they like with the characters. Not necessarily because the contract says so (nobody knows what the contract of each V-tuber says exactly, of course), but because the backlash would be bad for the company as a whole.

What does this means in practice?

• Replacing a performer (many times called voice actor/actress or VA) is unlikely. You can check what the rumours of that happening did to Kizuna AI, back then the most popular V-tuber, even if that is technically allowed under the contract. The actual identities and/or alt accounts of many of the most popular V-tubers are known in many cases (even if everyone acts like that is not the case) so pushing out and replacing one of the VAs would be counterproductive. After all, the parasocial relationship is not only with the avatar.

• Other uses of the IP typically get the performer a royalty. This has centered around merchandising and voice packs10, which is fairly easy to compute as each vtuber has their own products. It is unknown to me how this is managed for less clear situations, like games in which all vtubers of the company appear. So far, other uses of the IP have also ceased when the vtuber graduated (changed jobs, as we say in the real world). While the company might theoretically have the ability to keep at it, it doesn't make a lot of sense for merchandise (which the fans buy to support their idol… who no longer would be there).

So while the IP belongs to the company, it would be hard to use it without the vtuber participating or agreeing to it. AI presents a series of interesting case. Would the vtubers agree to have bots trained with their voice and typical answers to offer custom conversation to fans that paid for it? Would that work with the fanbase? I don't know. It is not something that has been done so far by the big ones, at least to my knowledge. What I don't expect to see is agents trained on the VA's performances to replace the VA's on stream, as I have heard some people in the investment community pitch. Mostly because I don't see an agency that does that surviving the backlash. For now, while other options for IP use can be attractive, I am not considering the cheap bot replacement thesis or the potential to increase the offering with custom agents.

Content, the basis of it all

The main metric to track how each agency is doing in terms of relationship with the fans is how much their streams are consumed and, at least in YouTube, Hololive reigns supreme, with 37.7 million hours streamed in September, according to Vstats

And in Q3 as well

In Twitch, the VShojo v-tubers dominate and Hololive does not really have a meaningful presence. But Twitch is way less relevant than YouTube in this segment11.

Total growth in hours in prior quarters was stronger, around 20% in both Q1 and Q2, and I suspect we will get back to that once the effects of Nijisanji nuking itself calm down a bit. Still, the category as a whole is growing even with that, and maybe more than in 2023 (total annual growth of 12.7%)12

Cover became the most-watched company only in 2023, with Anycolor being the dominant one until then. This year they have been solidifying that lead and taking share. While Hololive already had the most popular vtubers, Nijisanji made up for that in numbers, with about twice as many streamers. They still have around twice as many, but it is not enough to catch up to Hololive anymore. In this regard, the strategy of Cover is pretty clear: relatively few debuts, grouped in generations and well supported.

At the same time, they do try to keep a stable roster. Only 3 or 413 vtubers have left the agency since the start, although there have been a few more cases of dismissals14 bringing the total to 1315. Contrast that with more than 60 leaving Anycolor. When there are debuts, they are typically grouped in thematic generations of 4 or 5 members, with one of them (ReGLOSS) acting pretty much as an idol group as an experiment.

In terms of geographies, Cover is currently making content in Japanese, English and Indonesian, and a bit of Korean, although that one only as part of Hololive JP, while the others have official branches. They used to have a Chinese branch, but it was closed after an incident involving Taiwan. Nijisanji has a similar geographic footprint, except they have an official KR group, and then they have a joint venture (VirtualReal) operating in China. It seems like Cover is starting to do some content for China again, with some recent streams in Bilibili by some members of the JP and IN branches, but there is no official branch or announcement there. Personally, I hope they reopen there eventually, although I get why they decided to close given the harassment their vtubers were being subjected to. If they do, that might cause a bit of backlash in the current fanbase.

Streaming aside, Cover also has been focusing on the music and music video side of things of late. In the last few months, Cover vtubers have released some fairly successful music videos, and also have created music for several anime productions. The idea with this content is not only to make money directly, but to promote the vtubers outside the small vtubing bubble, little by little appealing to a wider fanbase. And they have been successful with this of late. BIBBIDIBA, released in march, is marching its way toward 100 million views in YouTube

As a result of the strategy of few but well-taken-care of talents with low rotation, accompanied by premium content, Cover has long surpassed Anycolor in streaming and content revenue, almost doubling them in the last quarter, and they are still growing both in revenue and viewership. As explained in his piece on Cover, the advantage should compound over time, as the best talent is likely to want to go to Cover rather than Anycolor due to the better terms… with a caveat. VShojo is smaller and American, but well known to provide more freedom and a better share to their talents, and while they have a smaller roster, it is led by Ironmouse (one of the most popular english speaking V-tubers) and Kson (who used to be a relatively important VA for hololive under another persona), so Cover needs to take care to avoid being surpassed in the future as they did to Anycolor. Aside from that risk, the only bad spot is their absence in China, but that would expose them to backlash elsewhere.

Merchandising

If Cover lags anywhere, it is in its merchandising strategy, and they are aware of it. Historically, Cover has focused on event-related made-to-order merch only. By event-related I don't mean only concerts and similar stuff, but also vtuber's anniversaries. They are slowly increasing the range of merchandise available, and when it is available (and where, because they used to have nothing available in 3rd party online stores or retail). Over time, the ratio of anniversary goods should go down as the standard goods increase.

The increase in availability and sales of cover merchandise has been disappointingly slow. That said, some efforts are starting to get results, and we have examples of collaborations with Round 1 (which you might know about thanks to ). But merchandising commercialization needs to improve at a better rate. I suspect this is slower for Cover because they are in-housing the planning and design functions for a good part of the merch, rather than just licensing out, to capture more value in the long run, but this is just based on some scattered comments, not something solid.

The shift from made-to-order event-related merchandise to standard one is important. First, it moves the price point lower. Second, performer remuneration for this one is lower (because they don't have to promote it specifically16)

There is an additional impediment, which is the fandom composition. Nijisanji fans are majority female, while Hololive ones are majority male, as we saw before17. As Altay mentioned in his article as well, there might be higher propensity among the female fans to get merchandise, so Cover might have a lower ceiling. Unless they are able to get good male vtubers (which so far the haven't been able to get right), they might have a comparative disadvantage to Anycolor here.

In general, I think it is something to watch. Their evolution is encouraging, but a bit to slow for my liking. The evolution of advances in the last few quarters points to an increase in distribution, and we should start seeing the results in the revenue mix.

Events

IRL events like concerts are a relevant (27% of FY2024 total revenue) but volatile line in Cover's revenue. Depending on the quarter, it can be huge or minimal. Still, it is an interesting way to get additional revenue from the most hardcore fans.

Cover has been probably the most successful vtuber agency in this regard, doing almost 3 times the revenue Anycolor did in the last year. Cover is run in a much closer way to traditional idol agencies in this sense, and they manage it well. The latest sets of live shows in the US have been a success in terms of attendance (although there were some practical hiccups). The good thing is that it is going well, the bad thing is that it probably scales much less than other areas in terms of the attention required from the performers and cost of opportunity of other stuff. Conversely, merchandise or IP licensing don't require that.

That said, I suspect these events won't be the biggest moneymaker for Cover, but I think the events are good to galvanise the fans anyway.

IP and licensing

Despite being only about 15% of total revenues in FY 2024, and despite thinking the Holoearth project is doomed to fail, I think in this area is where Cover is doing a much, much better job than anyone else in the sector. But let's talk about Holoearth for a moment to get it out of the way. Cover is investing about about 3-4 billion yen18 in their own metaverse alternative, a sort of Second Life reborn. It is not a tremendous amount of money, and it has some pull because they can use the streamers as a hook. But there are so many alternatives (Roblox or Eve come to mind, in very different sides of the spectrum) that I have a hard time seeing it succeed. Since it is relatively low cost, it might get to break-even thanks to the presence of hardcore fans… but again, not too optimistic on this. Hopefully management won't be to headstrong if it fails.

With that out of the way, let's talk about what is really interesting here, which is exploiting the vtuber avatars for two things:

• Advertise products

• 3rd party content

Why do I think Cover is doing such a fantastic job, if Anycolor actually derives more revenue than they do from this activity, almost 40% more last year? Well, because Cover is being far more strategic about the 3rd party content, and I think that can lead, in the long run, to better advertising partnerships, while Anycolor has gone full Krusty the clown here (and I don't mean this in a bad way! If you think this is a fad, Anycolor is the company that is doing things correctly from that POV).

From the point of view of advertising partnerships, Cover is doing more of them over time, mostly in Japan and Indonesia, although some US ones pop up from time to time. For example, they have announced partnerships for different vtubers with AmiAmi and with McDonalds in September, both for Japan.

But what I really like is their approach to 3rd party content.

• Engagement with video-game developers to make licensed games, not only skins for existing games.

• Holo Indie created as a brand to be able to release fan-created indie games with the vtubers. 10 games already released (4 of them free), all in the last 10 months, and 2 more announced. They are not making tons of money, but Hololive does not put much investment here, they basically release fan-made content and get a bit of money out of it. Taking into account at least one of the games seems to be around 100k copies (HoloParade), maybe there is something to it. More importantly, helps to induce the fans to generate more related content, even their way of life, keeping them in the ecosystem.

• Pretty generous derivative work guidelines, which again encourage fans to clip and create things based on hololive content (without even hindering monetization)

There is also the potential to create anime, but so far I don't know about anything firm regarding that (and, after the Kizuna AI anime, not super optimistic), other than the web anime Cover publishes.

In general, it is clear that Cover right now is focusing on achieving as much expansion of their brand as they can, and they do it by estimulating third party content to the best of their ability, with generous derivative work guidelines and supporting the release of fan-made games. The reason I am so excited about this is that we have proof that other virtual avatars had the ability to become massive successes based in aesthetics and little else, remember what the numbers in Vocaloid's case!

Cover's cost problem: Capital allocation

Cover is doing a lot of things internally, on top of talent management. Design and planning for merchandising, Second Life Holoearth development, some talent support for models (although other parts are subcontracted19) and recording, events… and that means a lot of costs. And that affects economics. While their gross margin is around 50%, depending on the quarter and the proportions of different revenue types, they do have a cost issue, mostly because they keep adding more functions.

Currently I think that what they are doing makes sense, Holoearth aside, and will benefit them in the long term. They are already outcompeting Anycolor, which was bigger than them only a couple of years ago, thanks to the care with which they have treated the English content expansion. But the cost trend is something to watch because while their tendency to make every function an internal one allows for more control, it also greatly affects profitability. Currently Anycolor has around a 30% operating margin, while in 2024 Cover had 18%… and that is overstated since the Holoearth investment won't start flowing through the PnL until the tail end of the current financial year. Essentially, Cover is reinvesting a high proportion of the cash flow generated in expanding and not pushing monetization hard, while Anycolor is keeping expenses to a minimum and pushing monetization as hard as they can and outsorcing as much as they can as well. Hence why with similar revenues and twice as many vtubers, Anycolor needs 120 employees less.

That does not mean Cover does not generate cash, though. They do. Last year they generated approximately 1 billion yen in FCF, despite the Holoearth investment. But currently they are not returning any of that cash, and keep about 8 billion in net cash. By way of contrast, Anycolor generated about 6 billion yen, and used 2.5 of them to repurchase stock, with a further 7.5 billion of repurchases during this summer. However, their revenue declined in the last quarter mostly due to the Nijisanji EN branch debacle. I bring up Anycolor's numbers as they are a good comparison that tells us just how much Cover is investing. And it is a lot.

Conclusion

I think the vtuber industry is here to stay, because it has generated a solid social niche with its own gossip, areas and memes. I also think that the way it is set-up enables for better generation of secondary uses of the IP, like animation and videogames20, that should ensure long-term royalties.

Inside the industry, I think agencies have a better chance at capturing the market because they have been able to insert themselves as curators and can guarantee the best talents bigger reach from the get-go. The fact that they own the IP of the avatars makes it more difficult for the best performers to leave and strike out on their own or in other agencies, but it is not impossible as Kyrio Coco/Kson's case demonstrates, so it is important to try to keep good relationships with them.

That last part is why I think Cover is a superior investment in the industry to Anycolor, despite the lower profitability at the moment. While in Japan Nijisanji has been able to keep their audience so far, they have blown up all their international operations, which I think present a much bigger opportunity in the long run, especially the US and other countries in Asia.

Cover has also been willing to invest in internal tech. I think vtuber avatars present some interesting opportunities for third party (games) content, and also for customized interaction down the road. Given the characteristics of the fan base, I am not sure that will work out, but I think Cover will try if they see an opportunity, while I don't think Anycolor has the capabilities or interest in building them.

That said, the investment case rests in vtubers not being a fad, but having staying power for more years. If they are a fad (anyone remembers frozen yogurt?), then Anycolor is the correct way to play it. Lower costs and a extracting mentality that will probably return the market cap in the next few years… if Hololive or others don't manage to challenge their dominance in the very profitable male v-tuber industry in Japan.

For me, Cover's case is more compelling, and at the current price very attractive, as I think they can increase revenues at a high rate and get significant operating leverage. While I am invested in the company, as you can see there are potential pitfalls, and I would encourage anyone to do their own research before jumping into it!

I have to confess I am no longer long Mandarake. Their sales evolution until April was really good, but the last few months have been fairly disappointing. I guess I overestimated their capacity of selling out of the existing stores and, especially, their traction online.

But the most worrying part is not that, but the margins in their Q3 (until June). Basically, in Q3 they obtained the same results in terms of profit as in Q3 last year, despite more than 10% increase in sales. That contradicts the trend in the last few years, and combined with the drop in sales has convinced me to drop it.

Now, the detailed version of the results is not out yet, so I still don't know the exact cause of the drop in margins. There was a slight gross margin reduction, but also an increased expense at the corporate level that I would like more details on (I know they started to look for more inventory, if that is the root cause, it might not be that bad)

I will still keep an eye on it in the coming quarters to see if this was only a temporary misstep, as this is still an interesting area, but the core thesis was operating leverage on a sustained increase in sales, and both key areas for it have not gone well, so time to cut!

IG Port: Justified drop?

IG Port dropped almost 10% after publishing its latest set of results, although it has already recovered part of that fall. The key is that the profit was lower than expected, according to management due to a shift on the recognition on some revenue to Q2

I am inclined to believe them, as the main shift seems to come from Kaiju no. 8 overseas revenue recognition, and that is going fairly well, as far as I can tell, being one of the most popular animes in the season (although not an outsized success). Most of their other properties seem to be doing well too, and finally we have confirmation of a new Spy x Family season. Suicide Squad Isekai is doing rather poorly though (not unexpected, I must say). I don't think they were part of the production committee there, but I also don't think they made a lot of money.

The pure video production business keeps generating losses ( fairly usual in anime, but so common of late for IG Port that makes me think their investment committee partners are taking advantage of their appetite to invest in interesting properties), but copyright more than makes up for it. Despite the relative failure, operating profit is more than 30% higher than the same quarter last year.

Net profit is down though, due to the lack of investment portfolio gains and a much higher tax rate. Net profit last year was a bit overstated due to the investment portfolio results and the payment to move The Ancient Magus Bride away from Mag Garden. Effective tax rate right now is a bit too high coming, I suspect, from the fact that the animation segment is loss-making, and those loses not being compensated in the other businesses due to the structure of the group1. I hope they manage to get a better treatment in that regard eventually, or better yet, get the animation segment to stop losing money.

In any case, both revenue and operating profit go the right way, and I am pretty optimistic regarding the future of IG Port seeing that the revenue from existing properties holds quite well.

Gravity: activist incoming?

Gravity's latest set of results was disappointing, as there was no revenue from China. That was unexpected for many, and raises questions about the licensing deal they have there, given the recent releases. That sent the shares tumbling down back in August.

But as I have mentioned in prior entries, I don't think business performance is the key, although did a nice review of that side in his substack. The key is GungHo needing cash or perceiving they are running out of time for strategic operations (like a take under). That, or an activist fund getting involved. In that regard:

• Gravity's share of the consolidated cash of the group stands now at about 41%, up from 36% at the beginning of the year, or 27% at the beginning of 2023.

• An activist (Strategic Capital) has purchased 5.5% of GungHo, becoming the second largest shareholder of the group behind Taizo Son (yes, he is the brother of Softbank's Son).

I would be surprised if we don't hear more about Gravity in the coming months.