Ubisoft - the most obvious mispricing in gaming?
UBISOFT ($UBI.PA / $UBSFY)
Let me start off with the crux of my thesis:
Tencent ~6 months ago paid more for 25% of 3 IP’s than the market values the entire company. You read that right, Tencent paid ~1.25bn to own 25% of Vantage Studios, which now houses Assassin’s Creed, Far-Cry and Rainbow Six Siege. This implies Tencent values those 3 IP’s alone at a whopping ~5bn, the stock trades at roughly ~700m market cap today, so ~6x today’s market cap. Tencent already holds a portion of Ubisoft (~10% indirectly, so this was not a blind/unguided investment). The rest of Ubisoft’s IP is still wholly owned by the company itself, including some gaming household names you would likely recognize. This does one very important thing for us as investors, it sets a floor. In any future situation regarding bankruptcy, buyout/M&A, sale process, etc, this transaction will be looked at to set value for those 3 IP’s ALONE, and ultimately indicates to us that Ubisoft is being over-dramatically priced for bankruptcy by the market. This leads to the next portion of my thesis: bankruptcy risk.
Bankruptcy risk, real? Does it even matter?
I’m being a bit facetious, of course it matters. The debt situation pre-deal was definitely not as attractive, but the Tencent deal bought time, lots of it. It was effectively a 1.25b cash injection directly put towards deleveraging. The balance sheet as of today is materially healthier with a significant cash balance and other levers such as extending debt maturity to forestall any bankruptcy concerns whatsoever. This also comes at a time where Ubisoft is rehauling their internal structure and implementing saving initiatives across the board. It is effectively off the table barring an absolutely mega-catastrophic turn of events, which is highly unlikely given some heavy-hitter titles coming onto the scene over the next 1-2 years.
Stepping back:
Let’s take a step back, how did we even get here? All-time-high’s were ~100 dollars a share in 2018, and 80 dollars a share as recently as 2021. Hell, we even had 30 dollars a share in 2023. You can’t just love something because it’s cheap, but at the same time you kind of can, especially when there are verified price floors from existing investors that are so heavily de-synced from reality. Anyways, Ubisoft mismanaged the hell out of their IP’s over the past 5 years and effectively has only produced slop from 2020 onwards (minus a few very important shining glimmers of hope recently in Avatar and Star Wars Outlaws that weren’t actually bad games, just poorly received). In 2018 Ubisoft was genuinely producing some of the best RPG’s available. An impressive run of AC Black Flag, Odyssey, Origins and Valhalla. They were fresh, graphically beautiful, the worlds were impressive and full (despite some repetitive quests). Even AC Valhalla was a very good game, and it printed $$$. Then, a few mis-steps in the form of their other franchises such as delaying Skull and Bones, xDefiant getting cancelled, AC Shadows delayed, etc. There was cultural and managerial turmoil and it translated to a string of failed/delayed releases. Does that mean it deserved to lose 95% of its peak value in under a decade going from a 15b+ market cap to a 0.7b market cap.. probably not.
Stepping forward:
Ubisoft’s operating performance has been awful, yes, but there is massive unrealized value in its franchises and deals. In addition to its mega-famous stack of IP’s (Assassin’s Creed alone selling ~220m lifetime units…), it has licenses to produce games under the Star Wars and Avatar banners. Also due to the Activision deal, Ubisoft has EXCLUSIVE streaming rights to Activision’s existing catalogue and any games it develops for over the next DECADE+ (2038)… read that again. Video-game streaming is one of the fastest growing industry CAGR’s there is. In a decade, we might not even need to play videogames on consoles anymore, and Ubisoft has exclusive streaming rights to the most famous series (Call of Duty) if that were to ever happen. It’s massive potential value.
Ubisoft also is starting to tap into what is going to be a HUGE money-maker for them, remakes and revisions of existing great games (the Nintendo strategy). Ubisoft has probably ~5 titles in the top 100 greatest games of ALL TIME. They have finally realized this and based on the Assassin’s Creed Black Flag Resynced buzz (releases in July) fans are EXCITED, go watch the trailers and look at the comments/hype. It’s been a minute since Ubisoft has been able to invigorate their fan base like this. Remakes are cheaper to produce and depending on how Black Flag performs, they may start churning them out yearly. This would produce material cash flows for them and allow them to focus on new developments while keeping the nostalgia train running. Also, take a look at actual reviews of Ubisoft’s last few games, they are slowly but surely getting better and better reviews with a less frustrated fan-base.
Some comparables:
A quick note: CD Project Red is probably a good Ubisoft comparable. They also had their fair share of trouble with a miserable Cyberpunk launch. Take a look at their stock if you’re curious how their turnaround is going. Their P/S ratio is very sporadic given they are a smaller studio and heavily dependent on releases, but it’s safe to say CD consistently trades at a normalized P/S of ~15x, compared to Ubisoft’s current 0.3-0.4x.
EA is also probably the best Ubisoft comparable. Yes, yes. I know. They are significantly more profitable (right now). But it doesn’t change the fact that EA just got a buyout offer in the LARGEST private equity deal to ever hit the market. EA is leaner, bigger, and more profitable, but they shouldn’t be worth 70x Ubisoft, it’s ridiculous. What they do is not something unachievable by Ubisoft, especially if AI starts allowing for game developing efficiencies (it already is). Before AI slop complaints get thrown, there are genuinely good use cases for it in games, I’ll leave it at that. EA trades at ~6.5x price to sales, again, a long ways away from Ubisoft’s 0.3x.
I know the profitability profiles are different, and again, that isn’t the crux of this thesis, but it’s important to look at the valuation disparity nonetheless.
The risk is real:
As excited as I am about this, there is of course risk. Asymmetric risk for the upside in my view, but still risk. The primary 3 being execution risk (I think remakes will mitigate this), debt covenants (again, some solid execution over the next 12 months will mitigate this) and political/family risk (this one is hard to mitigate). France does not want Tencent owning their IP, but this could actually be a good thing in that if there ever was a buy-out scenario it would force a competitive process, and as mentioned, Tencent already set the floor at 5bn (for only 3 IP’s). One thing to note, the Guillemot family not buying at the $4-5 dollar range is also a risk, but not familiar with the disclosure laws in France and maybe they have scooped some shares through some vessel.
Exciting catalysts and closing:
To me, the most exciting part of the thesis is the mismatch with Tencent’s implied valuation and the public markets. It is a massive disconnect and presents a near-10x opportunity. There is also a strong-existing brand within Ubisoft’s IP even if it’s tarnished for the time being. Back-catalogue revenues are up, 38M MAU’s for December (up 3% YoY). The IP is so far from dead it’s absurd to price it that way.
There are times in investing, when there is such asymmetric upside, that it makes sense to put all your eggs in one basket. I believe this is one of those times. You can never look for a perfect investment, they don’t exist. But there does exist situations that if you look hard enough, make no sense. It’s that irrationality, that disconnect, that fact that the market is emotional, that provides us such great opportunity.. and it’s one of the best ways for folks like us to make money. I feel like Keith, I like the stock :).
Positions: 55k $UBI.PA / $UBSFY shares across my Roth and Individual (options are limited for U.S. residents)
This is not financial advice.