Is Games Operators another seasonal gaming company from Poland?

Games Operators eight months after Infection Free Zone

Dec 12, 2024

Introduction
2024 performance and valuation
Product (game) and recommendations
Questions for future

1. Introduction

Eight months ago, Games Operators (GOP) released their highly anticipated game, Infection Free Zone (IFZ). Now that the dust has settled, it's time to look at how the company is performing and its prospects in the ever-evolving gaming market.

This article will delve into GOP's financial health and the success of IFZ. We'll examine the company's strategic decisions and their influence on its market position. Additionally, we'll glance toward the broader gaming landscape, identifying trends and challenges that could impact GOP's future.

2. Performance of IFZ and Valuation

Even though the release of IFZ was in line with my base case prediction:

Games Operators' stock performance has been disappointing this year, with an almost 50% decline year-to-date. However, the company's underlying financial health remains strong. Let's break down the factors influencing GOP's valuation and the role of their flagship game, "Into the Fire Zone" (IFZ), in this process.

Firstly, remember that IFZ was one of the most hyped games of 2024. It was projected to be a massive hit, with, as I wrote, "a particularly high chance of going viral, fueled by its unique real-world location-based gameplay and potential appeal to streamers and YouTubers." All these factors created high expectations and a demanding valuation, that then crumbled. As I stated in my initial analysis:

Looking at current market multiples and sentiment for game developers, at PLN 26-36 mln in revenue (adjusted for accounting differences) in 2024, the market could be valuing the company in the mid/ high twenties, for revenue of PLN 36-46 mln the price should be in the mid-thirties. All of that, not considering that the success of IFZ (optionally reinforced by publishing business) should increase multiples on the company.

The market's enthusiasm waned, leading to a contraction in valuation multiples. Investors grew disillusioned as the anticipated "Steam-conquering" success of IFZ failed to materialize. Consequently, it became evident that no foreseeable event in the coming year could propel GOP into the next tier of gaming companies.

Secondly, the publishing business has been an additional drag on the company's valuation. Recent releases, in aggregate, did not achieve significant financial success. In an industry with such a strong "winner-takes-all" dynamic, one successful title can offset many failures, so experimentation remains crucial. Nevertheless, GOP management should critically assess the viability of their current publishing strategy in the present market environment. As a wise person once said:

What really matters is, that companies that don’t continue to experiment and don’t embrace failure, eventually get in a desperate position where the only thing they can do is a Hail Mary bet at the very end of their corporate existence. Whereas companies that are making bets all along, even big bets, but not bet-the-company bets, prevail. I don’t believe in bet-the-company bets. That’s when you’re desperate. That’s the last thing you can do.

GOP's publishing unit should foster thoughtful experimentation and constant reevaluation (especially important when you consider the trajectory of 11 bit studios' publishing unit :)).

Lastly, despite GOP's strong financial performance, the broader market sentiment towards game developers has impacted its valuation. Investors, particularly in content-driven companies (as opposed to "live service" giants like EA, Riot, and Take-Two), are grappling with the crucial question: "Are pure content-driven companies a reliable business model?"

The market fears that GOP will follow the path of "one-hit wonder" companies like Drago Entertainment, Movie Games, CI Games, Ubisoft, and many more.

In summary, multiple headwinds have contributed to the company's share price decline of almost 50% year-to-date.

Overall, I am happy with my initial analysis. However, I did make some mistakes: firstly, the share of Chinese players was higher than I anticipated, thus increasing the average price per copy. I also mistakenly assumed that a console port would be released this year. A peak error rate and discrepancy in copies sold within the ~10% range is a very good result.

You can read the full analysis, including valuation and Monte Carlo simulation of the IFZ release, HERE.

3. Product (game) recommendations

GOP has shown a commitment to improving game quality, with an increase in positive ratings from 70% range to almost 77%. This demonstrates a dedication to enhancing gameplay and addressing player feedback.

To further elevate the gaming experience, focusing on user interface (UI) and overall design improvements could be beneficial. When I compare the design and UI of IFZ with other games in this genre, I feel there is room for improvement. Fundamentally, it's positive that IFZ's success was primarily product-driven, not marketing-driven, as this indicates a capable and creative development team.

One of GOP's strengths is its close engagement with the gaming community, facilitating short interaction cycles (between games and within a game) and allowing developers to respond quickly to player opinions. This responsiveness is crucial for fostering a loyal player base and ensuring games are tailored to player preferences. IFZ exhibits higher player engagement than other games in the genre. Maintaining this close relationship with gamers will be essential for future success, including increased DLC penetration.

On the other hand, I have always maintained that while gamers may have valid emotional responses to gameplay (too slow, too fast, too complex, etc.), their proposed solutions are often detrimental to a game's long-term success.

Feedback should be addressed thoughtfully and selectively to avoid stifling the creative potential of the developers.

I assume the decision to do a full release of IFZ in 2026 is based on data regarding game sales at different stages of its lifecycle. This is difficult for me to evaluate at this time.

4. Future

As an investor in Games Operators, I have a few questions.

Investments:

To better assess capital allocation and potential returns, please provide guidance on the approximate amount Games Operators intends to invest in:

Proprietary Games: Specifically, what are the investment plans for IFZ, Solar Expanse, and other upcoming titles? How are these investment levels determined by projected player interest and potential return on investment?

Publishing: What is the budget allocated for publishing titles like Survival Machine and other third-party games? What criteria are used to select publishing projects?

Other Endeavors: What investment is planned for new technologies (e.g., AI in game development), studio expansion, or other strategic initiatives?

Distributions:

What is Games Operators' dividend policy? Can you provide any indication of the dividend payout ratio or the amount of dividends we can expect in 2025?

Does the company have plans for share buybacks in 2025? If so, what is the estimated amount allocated for this purpose?

Competitive Advantage:

The gaming market is undergoing significant disruption due to AI, evolving player preferences, the rise of "forever games" and polarization (mid-market AA games are getting hammered). How does Games Operators plan to strengthen its competitive advantage in this dynamic landscape (higher quantity of smaller games or focus on those AA+ games)?

Talent Acquisition and Retention:

Attracting and retaining top talent is crucial in the gaming industry. What strategies does Games Operators employ to secure skilled developers, designers, and other key personnel? What trends does GOP observe on the gaming market (supply and demand characteristics)?

These questions are crucial for discerning whether Games Operators is truly differentiated from other “seasonal” Polish gaming companies. Insightful answers will showcase the company's unique strengths, its approach to sustainable growth, and its ability to adapt to the evolving gaming landscape.

With all those questions answered valuation seems to be attractive and Games Operators stays as my pick.

twyderka

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