My friend Jonathan Perez of Savex Capital gave an interesting presentation on video game developers. Jonathan is a smart guy and I always enjoy talking to him and hearing his insights. Below is a key slide of his where he highlights a potentially interesting opportunity. That outlier is a Singapore based company called IGG which is listed on the Hong Kong exchange (Ticker: 799 HK).
There are a lot of things to like about the company as it develops games for smartphones (high growth platform), with some size ($700 million in sales), a history of success (400 million downloads with flagship game among top 50 according to iTunes as of this writing), a founder with 30% insider ownership, and trades at under 4x EV/EBITDA and P/E of 6x. So it obviously looks attractive, especially when you consider that Activision and Take-Two trade at 33x and 38x earnings respectively.
But I’ve seen this movie before. There is a reason behind this cheap valuation – the dependance on 1 game. And in IGG’s case, 80% of revenue comes from Lords Mobile which has been a big hit for the company.
Broker Sunwah Kingsway notes that the company has 14 titles since July 2019 but none appear to be the next hit and expect sales from the firm’s top 2 games to decline. Total monthly active users (MAU) did reach a record of 24 million as Lords Mobile rose to 16 million from 14 million due to promotions while Castle Clash’s MAU declined to 3.8 million (their no 2 game). The balance from other games. Oriental Finance has a buy on the stock as they believe the games pipeline is rich and that new titles could surge.
So as you obviously understand, the key to this stock is either an increase in popularity and monetization of Lords Mobile and/or that of new games it’s developing. So what can an investor do? Simple. Play the game(s). So I downloaded Lords Mobile a few nights ago and start playing on the couch next to my 7-year old son Alexander. Alexander sees me and says “Oh dad, you playing that game. I had that on my tablet but deleted it. It’s not good. Pretty boring.” So it got the thumbs down from Alex. Now, on to the thoughts of this 45-year old. The game graphically looks nice and there are constant pop-ups to help guide you on what to do. But the screen is awfully crowded and there is information overload. I have to agree with my son. The gameplay itself is just boring. Do note that I played for under an hour. I upgraded stuff and did some attacks but the attacks themselves while visually nice are very hands-off. All you do is watch. So basically if you have the stronger army you win. Zero to little strategy. You know beforehand your own strength and can scout for the potential strength of the opponent. So it boils down to how quickly you can upgrade stuff. Upgrading comes from waiting or eventually money. So this gets a thumbs down from me as well. Maybe I didn’t play the game long enough but I certainly don’t see the attractiveness versus competitor Clash of Clans (COC). I just don’t think this game will survive in the long-run.
From watching my son play on his tablet, I noticed a trend in game development. Whenever a company comes out with a huge hit, it is followed by a ton of clones. You see this with Clash of Clans, Clash Royale, PUBG, Minecraft, Call of Duty Mobile and a ton of other highly successful games. Clones try to take a piece of the pie. Some may be slightly easier or simpler thus gaining followers among the younger crowd.
The gaming area has become a lot more crowded than people think. Personally, I got contacted by a startup with over two dozen games about to be published and a broker contacted me about a $70m bond issue for a Scandinavian game company. So there are a lot of people trying to create the next big hit.
Personally, I’ve been playing Clash of Clans since the brilliant Liam Neeson 2015 Super Bowl commercial.
As you may have noticed from the photo above, there are 1.1m ratings for Clash vs 50k for Lords Mobile. Tencent paid Clash developer Supercell $8.6 billion for an 84.3% stake. Supercell also developed two other very successful games: Clash Royal (1.3m reviews) and Boom Beach (185k reviews).
I believe there are some lessons I’ve learned from playing Clash that other game companies need to think about but also investors who are interested in these types of games. And no, it’s not about being addictive. That’s a given. A game can be addictive but still not last long or not generate enough money for the developers. Here is what I think:
- Don’t suck your players dry. One problem many games have is that they are designed to favor those that put money into it so unless you pay you can’t win. Years ago I used to play Top Eleven which was a football manager game. After taking my team to the Champions League final I’d discover an opponent which I just couldn’t beat. You can tell that the opponents put $$$ into it from the level of their players. After winning once in seven finals, I quit the game. COC is of course not a philanthropic institution and they need to make money, but the game is fair. Money helps you advance but doesn’t help you win. For example, it may take 14 days to upgrade a building or troop. Money can help you instantly upgrade the troop. However, when it comes to war it’s all about the strategy. So money doesn’t affect your ability to win. Strategy plays a huge role and attacks can be highly sophisticated at the highest levels. On upgrades, personally, I don’t mind waiting for 2 weeks. It gives me time to learn to play the game better at the higher level.
- Be smart about how you monetize. Recently they added a monthly game pass. It only costs EUR 5.50 and helps with a variety of things. It was a stroke of genius. Firstly it’s not just a small amount (price of a Starbucks coffee) but it’s also good value for what you get. Players have been advancing faster due to the game pass, but again it doesn’t affect gameplay. I didn’t get it because I’m in no rush but practically everyone in my clan pays EUR 5.50 a month. So they hit the gold mine with this move.
- Keep it interesting. At some point all players get bored for a variety of reasons. They may be stuck too long at the same level. They may be tired of using the same strategy. Also, consider that in games that include clans (teams) it’s not uncommon for people to have multiple accounts. This results in burn-out and eventually, people quit. The COC team is remarkably good at mixing it up. Here are 2 examples:
- No one was using witches. COC made them a bit stronger and all of a sudden numerous new strategies using witches were employed by players. And just as they may make a unit stronger they can make another weaker.
- New units (or heroes) or new defenses are introduced. New troops are always fun to try out, and just when you thought you dominated the game, a new defense is killing all your troops.
- Listen to the community. The COC team constantly looks for feedback in the COC forums, from top players and YouTubers. Being close to the community alerts them as to the problems and concerns and they fix it. Here are 2 examples:
- The top league had a ranking system was not entirely fair as people were gaming the system. They fixed this via a new Legends league which restricted the number of attacks per day.
- People at the highest level were having problems finding opponents and it took several minutes before players could play. A new system was introduced which reduced this wait time to zero.
- Keep building the brand. For example, Supercell created a cartoon series called Clash-O-Rama which is for all ages. They also COC Championship Final which is broadcast live via YouTube.
So as you understand it’s not just about building a successful and profitable game but having the team in place to keep it at the top. And that is where Supercell has a small competitive advantage and why Tencent paid the price it did. The great majority of game companies are essentially building commodity products – clones/copies of other games and crossing their fingers. Hence why some of these companies are trading low multiples. Now I could be wrong about IGG but personally I’m not interested. I hope the above thoughts help you when looking at similar type companies.
