Assassin's Creed Shadows And Tencent Partnership Will Unlock Potential

Key Takeaways

• Partnership with Tencent aims for franchise expansion and deleverage, targeting high-growth markets to potentially boost revenue and earnings.
  
• Planned cost reduction and strategic Anvil engine upgrades expected to enhance operating margins and strengthen long-term earnings.
  
• Ubisoft faces revenue growth challenges with declining bookings, high cash flow consumption, franchise reliance, and dependency on future content success amidst industry competition.

Catalysts

Ubisoft Entertainment SA produce, publishes, and distributes video games for consoles, PC, smartphones, and tablets in both physical and digital formats in Europe, North America, and internationally.

• The launch of Assassin's Creed Shadows demonstrated strong early sales and engagement, suggesting future revenue boosts as the game continues to perform well and receives ongoing content updates and expansions. This can positively impact revenue and net margins.
  
• Ubisoft's partnership with Tencent, creating a new subsidiary to focus on growing major IPs into billion-euro brands, will not only deleverage Ubisoft but also expand its franchises into high-growth markets, potentially raising revenue and earnings over time.
  
• Cost reduction initiatives of €100 million planned over the next two years through restructuring and investment selectivity are expected to strengthen earnings by improving operating margins.
  
• Upgrades to Ubisoft’s proprietary Anvil engine, evidenced by the success of Assassin's Creed Shadows, could lead to higher margin sales and increased revenue through improved game quality and consumer engagement.
  
• A strategic focus on sustainable growth with significant content releases planned for fiscal years '27 and '28 hints at future revenue streams and operating income potential as large franchises continue to expand.

Ubisoft Entertainment Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ubisoft Entertainment's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -105.7% today to 3.7% in 3 years time.
• Analysts expect earnings to reach €66.2 million (and earnings per share of €0.45) by about June 2029, up from -€1.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €142.0 million in earnings, and the most bearish expecting €34.9 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.5x on those 2029 earnings, up from -0.5x today. This future PE is lower than the current PE for the GB Entertainment industry at 129.9x.
• Analysts expect the number of shares outstanding to decline by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.48%, as per the Simply Wall St company report.

Risks

• The decline in full-year net bookings by 20% year-on-year, slightly missing the revised objective, reflects lower-than-expected partnerships and could impact future revenue growth and investor confidence in revenue targets.
  
• The significant cash flow consumption anticipated for fiscal year '26, projected to exceed €100 million, raises concerns about the company's ability to manage spending effectively and could affect net margins adversely.
  
• Intense industry competition and the reliance on a few major franchises for growth pose risks to revenue stability, making Ubisoft vulnerable to market dynamics and potential fluctuations in player engagement.
  
• The ongoing restructuring and cost reduction initiatives indicate improvements, but also suggest potential risks in managing workforce reductions and maintaining product quality, which could affect earnings and operational efficiency.
  
• The dependency on upcoming significant content releases in financial year '27 and '28 leaves financial performance heavily reliant on future titles' success, which introduces risk to consistent earnings projections if these titles underperform.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €5.6 for Ubisoft Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €12.0, and the most bearish reporting a price target of just €3.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €1.8 billion, earnings will come to €66.2 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 12.5%.
• Given the current share price of €5.61, the analyst price target of €5.6 is 0.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.