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CD Projekt share – A gamble for die-hard people – columns

CD project share
logoCD project red
countryPoland
BranchVideo games
IsinPLOPTTC00011
Market capitalization8.4 billion euros
Dividend yield
Stability dividend
Stability gain0.70 of max. 1.0

The spotlight of the financial community is on the CD Projekt share. Will the share start again after the publication of Cyberpunk 2077 and spoil the shareholders with exorbitant price gains, as it was after the release of “The Witcher 3“Was the case in 2015? Back then, the share price rose by a total of 400 percent for three years in a row!

Those who kept the share instead of cashing in, were still rewarded princely for their loyalty and can even look forward to book profits of 1,400 percent today:

Stocks with such high price gains repeatedly attract adventurers who are FOMO-driven crash on the supposed price rocket. At CD Projekt, the risk of a spontaneous purchase is perhaps even more pronounced than elsewhere, because many “Witcher” fans are convinced that cyberpunk will also be a complete success and that the share will inevitably continue to rise. However, this is not the case. In this share analysis I will show you how you can fundamentally analyze the CD Projekt share and assess the potential for risk and return.

The business model: This is how CD Projekt earns money

CD Projekt can look back on an eventful and successful company history. The origins go back to the early 1990s, when the Polish founders Marcin Iwiński and Michał Kiciński (who pronounces the names correctly?) Imported computer games and sold them at a bazaar in Warsaw.

Photo from the early days of CD Projekt

Photo from the early days of CD Projekt. Back then DCP.pl (source: https://www.cdprojekt.com)

You can read the full success story of CD Projekt on their Investor Relations page. For you as a (maybe) shareholder, however, it is crucial that today’s CD project earns its money in two segments:

Sales from CD Projekt (source FactSet Workstation)

Sales from CD Projekt (Source: FactSet Workstation)

The GOG.com segment

Almost a third of sales in 2019 were generated with the online sales platform GOG.com achieved. GOG stands for “Good old Games” in the sense of old computer game classics, which are brought back from obscurity after years and distributed over the Internet – sometimes even free of charge. Today, modern titles are also sold on the platform. GOG.com’s direct competitors are other online video game distribution platforms such as the much larger Steam.

Although GOG.com was responsible for 31 percent of sales in 2019, this segment will probably not play a role in the course of the share price over the next few months. Instead, all eyes are on the upcoming sales driver Cyberpunk 2077 directed. This game falls into the next segment.

The CD Projekt Red

In this segment the games are developed, published and ultimately the big sales are made. The leap in sales from 2014 to 2015 in the course of the publication of “The Witcher 3” reveals what potential is hidden in this segment. At that time, sales increased almost eightfold from one financial year to the next!

Jump in sales after the publication of The Witcher 3 in the CD Projekt Red segment (source FactSet Workstation)

Jump in sales after the publication of The Witcher 3 in the CD Projekt Red segment (Source: FactSet Workstation)

The numbers illustrate the potential of a successful video game that is being developed for various platforms such as the PC and various game consoles. However, creating a high profile video game is a tedious and costly endeavor. Cyberpunk 2077 production began in 2016 and is estimated to devour $ 314 million.

The majority of CD Projekt’s developer capacities are tied up over the years in the one project that is supposed to be the “next big thing”, while the previous bestseller including expansions and, to a lesser extent, the first segment GOG.com for the necessary cash Flow needs to keep CD Project afloat. Since the company’s success largely depends on a game, I refer to CD Projekt as a one-trick pony despite two segments. This is not meant to be derogatory, but rather indicates the entrepreneurial risk of such a management strategy.

Cyberpunk 2077 was originally supposed to be released in April. The three consecutive shifts from April to September to November to December 10th show how challenging the development of the game is that, according to an external tester, “tons of bugs” would have. So far, however, this strategy has paid off.

Development of the share price of CD Projekt including the three shifts of Cyberpunk 2077

Course of the share price of CD Projekt including the three shifts of Cyberpunk 2077 (Source: TradingView.com)

Understanding the CD Projekt share in fundamental analysis

One consequence of the management strategy is a fundamental development of various key figures, which is easy to get used to. Without background knowledge, it is impossible to understand why sales explode from one financial year to the next or why share prices rise over several years even though sales and profits are falling.

Profit explosion and then rising prices when profits fall - strange, strange

Profit explosion and then rising prices when profits fall – strange, strange

The profit explosion in 2015 is the well-known consequence of the successful publication of “The Witcher 3” and can also be clearly seen from the sales development and increasing margins:

Development of sales and operating margin of CD Projekt

Development of sales and operating margin of CD Projekt

With Cyberpunk 2077, the next sales and margin explosion is imminent, which has already driven the share price up.

The long and costly development phase of the next video game suggests that CD Projekt could run into financial problems if the old blockbuster, including the GOG.com platform, cannot bear the running costs long enough. Fortunately, the company is financially very stable. The current debt ratio is a low 21.5 percent. And it seems almost astonishing that the total debt of 345 million Polish zlotys turns out to be the free cash flow of the last 4 quarters. This means that CD Projekt could pay off all debts from the current cash flow within a year.

Development of debt and important balance sheet items for CD Projekt

Development of debt and important balance sheet items for CD Projekt

One more step back to the very atypical course of sales and profit, which occurs in an ascending wave shape. After the release of “The Witcher 3” caused record sales, sales (and profits) fell in the following years. But immediately after “The Witcher 3”, the development of Cyberpunk 2077 began. The price increase despite falling profits is due on the one hand to the resounding success of the witcher, who has strengthened the trust of the shareholders in CD Projekt to achieve great things in the future. A second reason for the exorbitant price gains was the low valuation of the CD Projekt share in 2015 with a PER of 6 at the time.


Is the CD Projekt share cheap?

It is obvious that the course of the coming months will crucially depend on the commercial success of Cyberpunk 2077. But in what form exactly? Because it is by no means the case that the share price will double when sales double. The exploding sales and rising margins are already factored into today’s share price.

Sales for the last four quarters from October 2019 to September 2020 was 683 million Polish zlotys. The release of Cyberpunk 2077 is planned for the end of this quarter (December 10th). The remaining 21 days should be enough to catapult sales from 683 million to almost 3 billion Polish zlotys. In the age of digitization, where some sales are made purely via the Internet, this is entirely possible. The margins are also expected to rise again, as they did when “The Witcher 3” was released, which also seems plausible to me thanks to the massive sales of the high-priced video game. In stores, the game is offered as a pre-order, depending on the platform, in a price range between 60 and 70 euros.

Due to the wave-like sales and profit development, the fundamental variables of CD Projekt lack the necessary stability for dynamic stock valuation apply in the usual manner. Nevertheless, the key figures displayed there reveal some helpful facts regarding the rating.

When “The Witcher 3” was published in 2015, the multiples such as the P / E or KCV (price / cash flow ratio) were only 6. This low initial rating left a lot of leeway for the price increases in the coming years in which the share as a result of rising prices with falling profits with ever higher multiples. From 2015 to 2016 the multiples doubled and even tripled in the following year.

Profit explosion and then rising prices when profits fall - strange, strange

Profit explosion and then rising prices with falling profits

Today the multiples are not 6, but between 19 and 25. Shortly before the start of Cyberpunk 2077, the CD Projekt share is valued a good three times higher than it was already months after the successful start of “The Witcher 3” . And that, although we don’t yet know whether Cyberpunk 2077 will actually go down as well as we hoped. In addition, the forecast increases in sales are just under five times lower than they were in 2016 when they were eight times higher. In the current situation, I see a rather unfavorable combination of a high rating and increased uncertainty.

Other international game manufacturers such as Activision Blizzard or Electronic Arts are rated with similar multiples, but without being a one-trick pony and therefore have a lower risk of a serious failure.

P / E ratioKCV
Activision Blizzard2321st
CD project19th25th
Electronic Arts2321st
Ubisoft3110

Conclusion: CD Projekt – A share for the good nerves and a well-diversified portfolio

I take my hat off to the performance of CD Projekt, who have managed to grow from nowhere into a world-renowned game maker. At the same time, management’s strategy of concentrating all development capacities on one title has so far more than paid off. This also applies to the shareholders who have been rewarded with annual returns averaging 63 percent since the publication of “The Witcher 3”. That is twice as high price gains as the shareholders of Amazon.

And yet the CD Projekt share is not a buy because, in my opinion, the risk-return profile is rather unfavorable. However, I wish all investors good luck and good gaming to all those who hopefully will hold the game in their hands soon! Tell me what you think of the CD Projekt share! By the way, if you are looking for less exciting quality stocks or if you want to diversify your CD Projekt portfolio, you will find Germany’s most popular stock finder guaranteed to find what you are looking for.

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The post CD Projekt share – a gamble for die-hard people appeared first on Aktienfinder.Net blog.

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