Video Game Studio Valuations – June 30, 2021 Update
Valuations of video game studios generally improved through the coronavirus pandemic as more people stayed home and consumers sought new avenues of social connection. The publicly-traded studios appeared to benefit from the increased consumer demand, as evidenced by an overall increase in financial metrics and valuations through June 30, 2021. This article will examine some of the factors that appeared to have impacted valuations in the industry.
Important notes: This article examines potential driving factors for video game studio valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
Our industry constituents for this analysis are listed below. Given the number of players in the industry, we split industry players into two groups: large-sized and small to medium-sized companies. Large companies are defined as those having a market capitalization of $1 billion or greater as of June 30, 2021. Small to medium-sized companies have market capitalizations of less than $1 billion. We focused on companies in developed countries, traded on major exchanges, and with a stock price equivalent of $1 or more as of June 30, 2021.
Figures 1 and 2 summarize three items for the large and small to medium-sized video game studios, respectively.
- Total median enterprise value (“TEV”)
- Median revenues
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”)
The latest fiscal year is notated “LFY” (2020), while the latest 12 months is labeled “LTM” (latest available information as of June 30, 2021).
The large and small to medium-size video game studio groups experienced substantial improvement in TEVs over the last three fiscal years. For the larger players, TEVs grew faster than revenue and EBITDA. On the other hand, small to medium-size companies saw TEVs increase proportionately with improvements in revenue and EBITDA.
However, TEVs generally declined among the largest industry constituents in the LTM in the midst of flat financial performance. TEVs broadly increased for the small to medium-sized companies despite declines in EBITDA. One potential driver for the increased valuations for smaller public companies in this industry is merger and acquisition and investment activity among private studios.
In the first quarter of 2021, 280 deals totaling $39 billion of value were announced and closed, according to a report published by Invest Game. These deals exceeded the value of all 664 deals of 2020 ($33 billion in total value). Industry consolidation can drive up the value of smaller companies as they tend to be perceived by investors as more likely acquisition targets due to their size.
Dean Takahashi of VentureBeat published a fantastic article questioning valuations in the industry. I highly recommend checking it out. In particular, he raises the question of why newer entrants to the market with much lower existing revenue streams and operating history trade at values well above more established players. This article will seek to explain what investors appear to be considering when assessing valuations in this industry.
See also: Bridging Valuations Between Private Companies, Public Companies, and Unicorns.
Valuation Multiples
Figures 3 and 4 provide historical median revenue multiples for each of the video game studio groups.
The historical trend of revenue multiples has differed relatively significantly between the large and small to medium-sized studios. The larger companies traded at higher multiples than smaller companies and increased over the last three fiscal years. On the other hand, the trend of revenue multiples for small to medium-sized companies was less favorable.
Figures 5 and 6 present historical median EBITDA multiples for large and small to medium-sized companies in the industry, respectively.
Similar to the trends in revenue multiples, the larger industry players exhibited more favorable trends in median EBITDA multiples. These companies experienced a smoother improvement in EBITDA multiples over the last several fiscal years. Median EBITDA multiples for the smaller companies declined significantly in the previous four fiscal years. However, the smaller companies exhibited significant inconsistency in profitability, driving significant EBITDA volatility. This creates analytical “noise” when examining trends in EBITDA multiples.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 7 and 8 present a summary of the historical and projected revenue for each group. Note that “NFY” means next fiscal year; NFY (blue line) = calendar 2021 for most companies, NFY (orange line) = calendar 2020 for most companies. “Current year” means June 30, 2021, while “prior year” means June 30, 2020.
Interestingly, the revenue growth patterns of both groups of companies were similar. On a projected basis, the larger companies expect to generate slightly higher revenue growth than their smaller counterparts. It is important to point out that nearly half of the smaller constituents did not have analyst-projected revenue growth estimates.
In Figures 9 and 10, we present historical and projected EBITDA growth rates.
Historical EBITDA grew significantly for both groups analyzed, and both groups expect significant growth going forward. However, the smaller constituents projected significantly higher EBITDA growth rates, particularly in NFY+1 (2022). Again, we noted that nearly half of the smaller companies did not have analyst-projected EBITDA growth estimates.
When plotting projected growth rates against LTM valuation multiples, there appeared to be some loose correlation. Figures 11 and 12 present the LTM revenue multiples for each group compared to their projected growth rates.
Revenue multiples for both groups seemed to trend positively with projected growth rates. However, there are inconsistencies within the data set. Among the largest video game studios, companies with projected 3-year compound annual growth rates of 5% to 10% traded at LTM revenue multiples of 0.7x to 10.9x. In addition, over half of the companies within the smaller size grouping did not have projected data to analyze. Four companies with projected financial information had projected revenue growth rates ranging from -8% to positive 6%. Still, all traded around 0.7x to 0.9x LTM revenue.
In Figures 13 and 14, we present LTM EBITDA multiples relative to their respective projected growth rates.
Similar to the trends observed in Figures 11 and 12, there appeared to be some tendency for companies with higher projected growth rates to trade at higher valuation multiples. Again, we noted several inconsistencies in this proposed relationship.
The inconsistencies noted above suggest that investors are likely considering growth in conjunction with other factors in valuing the publicly traded video game studios.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, broader product portfolios and revenue streams, access to various distribution channels, and better availability of capital.
Figure 15 presents a possible correlation between size (measured by market capitalization) and LTM revenue multiples for the larger studios. We did not observe a meaningful relationship between size and valuation multiples when analyzing the smaller companies.
Based on the data presented in Figure 15, there appears to be some correlation between size and LTM revenue multiples. There again were inconsistencies in the relationship, suggesting that investors are weighing numerous factors in their valuations of companies in this industry.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold (mostly) true for the largest studios, as shown in Figure 16 below. No meaningful correlation between profitability and revenue multiples was observed among the smaller players in the industry.
There appears to be some correlation between multiples and margins in the data. Again, we noted inconsistencies in the relationship for several data points.
Tying it All Together
The trends observed in this article suggest that growth, company size, and profitability all influence (to some degree) the valuations of the largest publicly-traded video game studios. However, size and profitability did not appear to influence valuation multiples for the smaller players in the industry. We noted that projected growth rates seemed to impact valuation multiples for these constituents (despite the limited forward-looking data available).
One interpretation of these trends might be that the largest companies in the industry tend to trade on their traditional fundamentals. Established companies generally tend to be valued based on their size, growth prospects, and profitability, among other factors (as shown in our other industry analyses).
Interestingly, the valuation multiples for the smallest publicly-traded video game studios were not broadly higher than the largest companies. This, perhaps, suggests that investors are “capping” valuations for the smallest companies based on the multiples observed among the largest companies.
A summary of the observations in this analysis is presented below and compared to those we made as of December 18, 2020.
We hope you found this analysis helpful. All input, feedback, suggestions, and questions (including disagreements with our high-level analysis) are welcome! Thanks for reading.
***
The quantitative industry analytics shown in this analysis was powered by ValuAnalytics’ proprietary valuation analytics platform. If you are looking to assess how your company or client benchmarks against its publicly-traded peers, let us help you automate and accelerate your analysis. ValuAnalytics provides cost-effective, expert-level valuation analytics to give you the insight you need to make better-informed decisions around valuation. Click Request Service to get started.
