G5 Entertainment

Research note


G5 Entertainment: Growth rates as expected

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In our last research update we had estimated a 6% quarterly growth. The Q/Q growth estimate was spot on, with one little problem, it was in USD and our estimate was in SEK. 70% of the company’s revenues are in USD which means the weaker dollar has a high impact on revenues exchanged in SEK. We think this is solid numbers with the background of the explosive growth in the last 12 months.

The stock market had a different opinion sending the stock downward 12%. The stock is down more than 35% since the all-time high a month ago. Our base case scenario indicates a stock value of SEK 325 in comparison to the current stock price at SEK 250. 
The biggest concern amongst investors is probably the shattered growth momentum and how long it will continue. As stated below the growth in USD is still positive which means many KPIs still will be positive in Q3. The most explosive growth however began in Q3 and Q4 last year, which means the Y/Y growth will show smaller numbers the upcoming quarters, which could have an negative impact on the investor's reaction when the Q4 numbers is presented.   
We believe revenues reaching a current plateau is only natural for the games portfolio, were the biggest revenue driver Hidden City is in a more mature state. We already have estimated a slowed growth the following quarters were the big titles will churn a bit and new titles will rise. For example the new Match 3 title “Pirates and Pearls” are showing a solid performance in its current soft launch. 
The most interesting thing to look at in the Q3 report will be how much the company has spent on user acquisition. Last quarter this was at a record high with 26% of total revenues. If G5 has managed to maintain growth at this level and decreased user acquisition this will have a noticeable impact on profitability. We however believe user acquisition will be around 25% and anything below that will come as a positive surprise. 

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