I remember this company from my middle school days; they developed sick MMO's. Similar to any MMO's the way to sustain profits would be to maintain long-term subscriptions, the p2p subscription any company gives out requires that they please their clients with constant software updates/upgrades. Losing customers is fairly easy, and regaining lost customers is very difficult. They cannot increase prices, they cannot lag behind other competitors, therefore growth will be slow.

Similar to NFLX, maintaining the customer base while keeping prices down was what made them a market darling, the moment they raised prices and alienated customers, they lost more than half their value in one quarter.

Other than Activision Blizzard, all other video game or computer game company is not the best value investing or long-term investment, imo.

Interesting. What other info do you have on these contracts they have to license the game? Has someone already given them the 40 million? Is someone contractually obligated to like it seems you're saying, or is it a plan that others have merely shown interest in?

You say the worst case scenario is that they do that and double their revenue (what about the cannibalized lost revenue from Ragnarok Online 1, wouldnt that make it less than double?) making it a double bagger plus. To call that the worst case scenario seems quite disingenuous.

I thought a stocks price had to double to call it a double bagger, not its revenue. There is a big difference, obviously. It looks like they had negative income in 2006 and 2007. What if this doubled revenue you're predicting comes at a negative profit margin?

Betting on a video games success seems quite random and with fickle and unpredictable outcomes, which is sort of the antithesis of value investing. Conversely, MMORPGs profit from a subscription service (the ones ive played at least) consistently which is the kind of predictability that is to be sought out by a value investor.

I guess if the games close to coming out (which it is) and they still have more cash than their market cap you really do have a solid amount of downside protection.

I think that's a bit symplistic of a view. Income from the older RO1 is presumably drying up, and the development of RO2 could continue to burn cash. Plenty of highly anticipated games that see delay after delay and dissapoint in the end. I have no insight at all in RO2, but you certainly have significant risks here.

I know this company fairly well, did some research on it. The catalyst is RO2 -- if it's a great game and generates tons of $$ you'll make a multibagger for sure. They are also making some small inroads on mobile gaming, social gaming and character licensing. It is a compelling investment, but there are things you have failed to mention.

People have been waiting for RO2 for years -- b/c well they were supposed to launch this game many years ago! Part of the reason the company is priced this way is that the RO2 launch has been delayed time and time again -- promised to be launched and then delayed. This is very very frustrating to investors.

Also RO1 was published initially in a time where MMORPG were relatively new. Now, RO2 will be facing much much stiffer competition. WoW, Netease games , etc.etc.

You also have the risk of RO2 being delayed again. Do you have good reason to believe that it will be launched on time this time other than it can't be delayed for a 11th time! (I don't know the actual exact number of times it's been delayed for). Finally, another risk (catalyst) is that GRVY keeps it's cash in South Korean Won. If i did jump it, it would be with a small position.

Various companies in their big market areas (Japan, Philippines, Taiwan, Singapore and Malaysia) are contractually obligated to provide a total of roughly $40 million in cash + % of revenues in exchange for licensing and translation rights into their various countries, when the game is released. As it has not been released yet, they do not need to pay yet.

I should've explained this a little more clearly. They are already making 40 million in revenue per year; the release of RO2 will give them an additional 40 million in licensing revenue + % of revenues. Even if the % of revenues just ends up being a cannibalization of RO1 subscriptions (meaning a net of zero), that's still roughly 80 million in total revenue. I believe that the effect of this alone should double their present stock price, though I suppose it's possible that nobody cares and the stock remains flat to trade at a P/E ratio of 2.5 as a result.

This should not come at any additional negative profit margin, as their present balance sheet and income statement already takes into account the costs of setting up RO2.

This is true. You are essentially betting on the outcome of one game, so it's not really value investing per se. However, the safety margin is rather high, and this is a very well known company on the cusp of releasing a game that has been highly anticipated for years now. The downside risk compared to its current stock price is pretty minimal.


It's not burning cash; the momentum of RO1 + revenues of their other games still gives them a positive net profit per quarter of 6-8c per share. Even without RO2, the stock is priced well below its NCAV and it's net net positive.

It's possible that RO2 can disappoint, but again, they are presently guaranteed $40 mil in licensing fees upon release of the game, which would double their revenue for a year.

It's possible that the game will be delayed again pending the outcome of its upcoming CBT and OBT, however, this time it really looks like they are finalizing the game for release by first quarter 2012. The delay has been costly, as originally the guaranteed licensing revenues was supposed to be $60 million instead of $40 million, but companies backed out due to repeated delays. However, as long as the company is not losing money, further delays won't hurt all that bad, unless other companies drop out as well. Since it took 4 years in delays for the recent drop to occur, the risk of that isn't all that high.

No, it's not burning cash right now, but what will happen if they keep delaying RO2? The RO1 revenue stream will be drying up at some point in time, but a lot of the costs they have will be fixed.

Also, the longer it takes to develop a game, the more likely it's going to be crap. Duke Nukem Forever is a sad example, but stuff that would be good 5 years ago isn't necessarily good today. When a company is developing a new game it's maybe even better to see them burning cash for two years and see a product, than a company that is initially cash flow positive, but is going to take ten years and produce crap in the end.

This is true, but I do think that RO2 will be released in 2012 even if they delay. If they don't then I will have to re-evaluate.

The first closed beta only occured about a year ago, so it hasn't been that long. Originally they built something that was supposed to be RO2 in 2007, but it was crap so they scrapped it completely for this present iteration. So far, the present iteration is promising.

I agree with the fact that the longer it takes a game to come out the worst it usually is but I think the mmorpg model is much better for this than a standalone game. They are allowed to(and should be) make updates to their product which takes some of the risk out. Also with this being a sequel to a still popular game it mitigates some of the risk. That being said I know nothing of the stock but I am long atvi.

ATVI is one of the worst investments I ever made not from a profit loss perspective, but I really believed that it was undervalued, held it for 2 years for a measly 12% gain (including dividends) and sold it before it moved. Ah well.

Yeah I'm worried about a catalyst but it's at a good price and was my best stock since I started in April. Well it was until today. What do you think about it now?

Not sure how much ongoing interest there is in this discussion, but I'd thought I'd throw in two holdings of mine: Clorox (CLX) and Heinz (HNZ).

They are both big but not huge consumer staple companies who have stable core businesses and some opportunities for overseas growth (imo). They do not seem to be doing anything particularly exciting or stupid but have cash flows to invest in their business and to pay solid dividends.

Commodity price rises are a risk, but I feel like they will have some flexibility to raise prices both because they have strong brands and sell some products that customers will pay more for (e.g., Clorox's 'green' cleaning products).

Clorox stock price has been up and down a bit following Carl Icahn's now abandoned attempt to buy the company. I wasn't happy to see that management spent $12M ($0.06/share) to fight him off, although I agree with rejecting his offer. I have held CLX since 2008 and have considered buying more if the stock gets down to $60ish (which would be 4% dividend yield).

I bought HNZ this August when the market was melting down a bit, and it has been pretty boring so far, which is what I wanted. I think earnings are coming out next week.

I don't expect either stock to go up much faster than SPY, but I do expect them to drop less when the market sells off. I have no particular plans to sell either unless their business deteriorates or I think stock prices get very overvalued.

What blogs/websites/periodicals do you guys read? I'm interested in reading more about current corporate transactions/deals and industry trends (consolidation, new competitors, increasing costs, etc.)

+1 to this.

Great thread so far - I like seeing different opinions and the ways you guys analyze companies. All very insightful to me.

I would prefer we stuck to analyzing companies with a 1B+ marketcap. I do find it interesting hearing aboutcompanies like GRVY but I prefer mid-caps over small-caps because more information is available on the company. I usually scan various rating sites and they do not cover any small-caps. This could be a bad idea using a site such as Morningstar, open to opinions on that too. I like that they update their analysis after each big event on widely held names and they provide a ton of information to begin as a starting point for researching the company. If you guys stick to the SEC information like the 10-K please mention that too.

I read Barrons and use Yahoo and Google portfolios to collect headlines from around the web on stocks I'm interested in and to keep an eye on my holdings.

The only problem I see with the market cap thing is that what new things are we going to say about them? They're pretty known entities--and we'll just have another 'great CSCO debate'. Speaking of which--to everyone who was on the other side of that debate I'll now graciously accept victory on that on behalf of myself, Yowzers, and Najdorf.

long term investing =/ 6 months or 25% gain

Well, in October we could have said things like "holy crap, did 3M really drop below $70?".

This is not true. There are plenty of companies that are misunderstood even at that market cap (1 billion dollar market is still pretty low imo).

True, although CSCO is up 40% from the lows, fwiw.

What would be the reason to go long a gaming stock? I see them as a bad version of pharma (lower quality customers, stealing/pirating rampant, re-selling of games, constant need for innovation, almost no way to guarantee long term value of their games, etc.). Not to mention that there are new competitors in a market too small/almost zero barriers to entry which completely remove any competitive advantages blizzard or EA games has (tablets, phones).

I don't know what would make me want to go long one unless there was actually a way to stop piracy/monetize their games in asia or valuations get to a level where it's "too cheap to ignore". I can download zelda skyward sword right now if i wanted to and the game doesn't even come out for a week.

You do point out some things that I totally agree with wrt gaming companies, but it's more nuanced. Games that require online functionality don't really have a piracy issue. There is not always a real need for innovation, most big titles are just newer versions of the same game. Some markets do have big barriers to enter such as ps3/xbox/pc games (developing a game like battlefield 3 or modern warfare requires a big budget and a lot of specialist knowledge). Companies in the mmorg space can have a very stable revue stream when it reaches a critical mass.

Those aren't really barriers.

Highly popular games which also require an online component CAN be pirated.

I remember reading something about how a large portion of World of Warcraft traffic is driven by China but a substantially smaller portion of revenue comes from there.

That's cause it's cheap to play WoW in China. Also in China a lot of people were playing WoW for a living.

Y
Sure they are. The number of parties willing to fund 100M+ for the development of an unproven game with an unproved developer must be very limited. And being in a business that depends on specialist knowledge and talent is a barrier to enter. You need to be able to attract talent to compete. Apple and Google for example have a good competitive advantage at the moment because a lot of the most talented people do want to work there.

Everybody with some money can start a company that build phones. But creating a company that can compete with the iPhone? In theory that also only requires a lot of capital and human talent. It's basically the same story with games. Everybody can start a company that build games, but if you want to compete with modern warfare or world of warcraft? Good luck.
Sometimes, to some degree, but I can bet you that everybody playing WoW on the official Blizzard servers is paying Blizzard for it. There is no work around. They might get less because they make it cheaper in China, and/or they sell less additional services.