Rising User Acquisition Costs Will Pressure Margins Yet Diversified Mobile Portfolio Should Endure

Catalysts

About Modern Times Group MTG

Modern Times Group MTG is a mobile and online gaming group focused on casual and mid-core titles across word, strategy, racing, tower defense and RPG genres.

What are the underlying business or industry changes driving this perspective?

• Although MTG is benefiting from sustained growth in mobile gaming engagement and a diversified portfolio of evergreen titles, dependence on a few large franchises such as RAID and Forge of Empires leaves future revenue exposed if LiveOps or IP integrations fail to sustain player spend at current levels. This could cap top line growth and pressure EBITDA margins.
• Although direct-to-consumer channels, regulatory pressure on app store fees and alternative payment frameworks can structurally lift unit economics over time, the transition requires upfront investment and execution risk around adoption. This may delay any meaningful uplift to net margins and earnings beyond 2026.
• While disciplined user acquisition supported 15 percent organic growth and strong cash conversion, continually rising CPIs in performance marketing and more expensive Q4 inventory could force MTG to either accept lower ROAS or reduce scaling of new titles. This could limit revenue growth or compress operating margins if spend is maintained.
• Although the pipeline of new games in word, puzzle and strategy segments is starting to scale, the hit-driven nature of mobile gaming and the lack of clear growth drivers in older Plarium titles mean that failures in the 2026 pipeline could offset gains from genre growth. This could weigh on group revenues and adjusted EPS.
• While AI enabled tooling and data driven LiveOps offer scope to improve asset productivity and personalization, competitive studios are adopting similar capabilities. As a result, any cost or monetization advantage may prove short lived, limiting the long term impact on net margins and cash flow generation.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Modern Times Group MTG compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Modern Times Group MTG's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.1% today to 9.2% in 3 years time.
• The bearish analysts expect earnings to reach SEK 1.2 billion (and earnings per share of SEK 10.75) by about July 2029, up from SEK 11.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK1.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.9x on those 2029 earnings, down from 1328.7x today. This future PE is lower than the current PE for the GB Entertainment industry at 25.4x.
• The bearish analysts expect the number of shares outstanding to grow by 2.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term shift in player attention and spending towards new hit games and emerging genres could erode engagement in MTG's aging key titles such as RAID, Forge of Empires and Bloons TD 6, especially as management itself does not expect legacy Plarium games to return to growth. This would weigh on group revenue and earnings growth over time.
• Rising and structurally high user acquisition costs, combined with MTG's strategy to keep UA spend around 37% of revenues and use AI mainly to increase output rather than reduce costs, could compress marketing returns as competition for mobile users intensifies. This may limit scalability of new titles and put pressure on EBITDA margins and net income.
• Increasing dependence on a concentrated portfolio where the top three games contribute 51% of revenues, together with declining performance in franchises like Tower Defense and parts of Plarium outside RAID, heightens the risk that underperforming events, weaker LiveOps or delayed new game launches could create volatility or outright declines in revenue and cash flow.
• MTG's growing reliance on direct-to-consumer initiatives and evolving app store fee structures may take longer than expected to materially benefit economics, as regulatory outcomes at Apple and Google remain uncertain and global rollout is complex. This could delay any structural uplift to net margins and free cash flow.
• Ambitious growth plans in casual and mid core gaming supported by substantial M&A and potential PlaySimple IPO proceeds increase financial and execution risk. Integration challenges, tougher comps after an exceptionally strong 2024 and 2025, and a leverage profile already above SEK 4 billion in total net debt could constrain flexibility if organic revenue or EBITDA growth slows.

Valuation

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

• The assumed bearish price target for Modern Times Group MTG is SEK145.0, which represents up to two standard deviations below the consensus price target of SEK166.25. This valuation is based on what can be assumed as the expectations of Modern Times Group MTG's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK190.0, and the most bearish reporting a price target of just SEK145.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be SEK13.5 billion, earnings will come to SEK1.2 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.6%.
• Given the current share price of SEK122.6, the analyst price target of SEK145.0 is 15.4% higher.
• 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.