For this edition of ValueTeddy’s Write-ups, we are are looking at a smaller Swedish game developer, publisher, and distributor named Thunderful.
Thunderful was created in 2019 through the merger of Bergsala and Thunderful. The company went public in December of 2020 and had saw some volatility to say the least.
The Business
Thunderful splits their business into two segments, Games and Distribution. Games include development and publishing of their own and external IPs, and Distribution refers to distribution of Nintendo products and other gaming hardware, accessories, and toys.
I get the feeling that Thunderful try give the appearance of both these segments being somewhat equal in size, but in reality more than 90% of the revenue for the last twelve months come from Distribution. So a more accurate description is that Thunderful is a distributor which also has a very small developing and publishing arm. As I understand it, Thunderful aims to grow the Games segment significantly, while expecting slow growth in the Distributions segment. According to their financial targets, they aim to achieve organic growth in the Game segments exceeding 25%, complemented by acquisitions. For their Distributions segment they aim to grow organically between 5% and 7%.
As you can see in the image above, the expectations were quite high after the IPO, but these were then not at all met when they released their first quarter of 2021. I personally think this has to do with the way the company describe themselves, giving the appearance of being a game developer/publisher while the reality is that it is a Distributer. The framing as a game developer does of course bring our mind to other game developers and their high margins, and the accompanying high multiples, but I don’t like it when a company tries to frame themselves as something they are not. This does not exclude the possibility of Thunderful actually growing the Games segment and actually becoming 50/50 Developer and Distributer, but I don’t think it wise to ascribe similarly high multiples to Thunderful until they can prove that they can actually grow their Games segment, and increase their margins. Speaking of margins, lets move on to some numbers.
Financials
At the time of writing this, the Q2 report for 2021 is the latest report, all figures will be in SEK.
For the last twelve months, Thunderfuls revenue was 3.1 billion, of which only 245 m was from Games and the rest from Distribution. The gross profit margin was about 26% and the operating profit landed just above 200 m. This represents an operating profit margin of about 6%. The net income was just below 130 m, and after foreign exchange gains the total earnings were 170 m. The operating cash flow before changes in working capital was about 240 m but after changes in working capital the cash flow from operations was -70 m, mainly due to a large decrease in inventory and prepayments to suppliers. Compared to the full year 2020 the revenue is about 3% higher but the operating profit decreased by about 4%.
The latest balance sheet has about 70 m of tangible fixed assets, and 1.3 billion of current assets. Total debt is about 900 million, of which about 640 is short term debt, leaving a pretty conservative balance sheet with net assets of about 450 million.
Valuation
At a price of 64 SEK per share, the total market cap is about 4.4 billion, which gives us a valuation of about 22x operating income, and a P/E of about 25.
Final Thoughts
I have explained some of my negative thoughts on the company earlier in this post, and here are some more: being a distributer of physical items such as Nintendo consoles causes them to compete with for example Amazon. To me, Amazon is one of the scariest competitors one can have, and I don’t see the upside in the physical distribution business of Thunderful. They are making money, but I don’t think it looks like a great investment at this valuation. In my eyes, stock price and valuation could be cut in half but still not be cheap.
Some positives are that the board and management own a significant amount of the shares, and if they can achieve their financial goals they could grow into the valuation in a few years. But looking at the current financials, I don’t think the valuation offers an attractive reward given the risk. 22x operating income requires Thunderful to grow significantly, and since Games is such a tiny part of the company today, this seems like a tall order to me. At a much lower valuation, this could be an interesting case, but I think the valuation is far too high.
I hope you liked this edition of ValueTeddy’s Write-ups! If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com. Please note that this is for informational purposes only, and it is in no way financial advice and I’m not your financial adviser.
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