Nitro Games: Low Risk, High Potential Reward
Redeye Research Note 2021/02/23
Nitro Games continues to impress as it delivers yet another great partnership, now with the extremely popular social media company, Snap Inc., Nitro has signed an agreement to develop a game for the Snapchat platform. The development will begin immediately, and the game is expected to soft-launch in 2021. Extending the already well-filled games pipeline by an additional game, the pipeline now consists of four games in total. We are pleased to see that Nitro will receive a significant revenue share. We think the wording suggests anywhere between 40-60% of revenues going to Nitro. The game will launch on a completely new mobile platform and will be monetized via either Tokens (IAP) and Snapchat ads. Nitro will receive a small upfront payment (undisclosed) for the development of the game. We view the deal as very favorable, reducing the risk by receiving an upfront payment but still enjoying a large upside via the significant revenue share.
Snapchat is a huge social platform that is still growing. Daily Active Users increased 22% year-over-year to 265, per its 2020 Q4 report, of which 92 million DAU’s were from North America, 74m from Europe, and 99m from Rest of World. Over 75% of the demographic aged 13-34 years old uses Snapchat in the U.S., with 30 average daily app opens per user and over 5 billion Snaps created a day on average. Snapchat launched mini-games on its platform in April 2019, and the venture has been very successful as Snap announced in June 2020 that over 100 million players have played Snapchat games since the launch.
Games within social media platforms are an excellent way to monetize its user base without disrupting the core Snapchat experience. The trend of gaming within social media apps is new in western societies but is commonplace in China. The Chinese social media platform WeChat has done this to great success as it introduced mini-games on its platform way back in 2017. WeChat has over 1 billion users today, and mini-games enables monetization of the user base without disrupting the core experience. It is difficult to monetize social media apps without causing a lot of disruption, leading to a lower retention rate. Mini-games offers leads to users spending more time within the social media platform and offers a more non-disruptive and immersive form of monetization. The male-to-female ratio for traditional games is skewed toward the male user base. However, WeChat mini-games have proven more attractive to the female user base with an equal ratio of males-to-females.
No details about the game were announced, but Nitro Games has a history of developing mostly shooter games, and we, therefore, suspect this to be no different. Shooter games are not as popular with the female user base, which makes up roughly 60% of Snapchat’s total user base. We will therefore follow the announcement of the game with great interest. It is probably safe to assume that the game will contain heavy social aspects to it, as the Snapchat mini-games are all about playing with friends on the platform. So to summarize, we expect a social, casual shooter that maybe is more appealing to females than the traditional shooter.
An important aspect of free-to-play games is User Acquisition, which to a high degree will be organic since the Snapchat platform will funnel users to the game. This heightens the probability of the game being financially successful and popular. The Customer Acquisition Cost (CAC) payback will probably be very low thanks to this. It is in the platform provider’s (Snapchat) best interest to monetize games in its portfolio which benefits both Snap and Nitro.
It is difficult to estimate the financial impact of the game, but surely offers a good risk reward scenario. Shares in Nitro Games skyrocketed 60% on today’s news. We believe that the majority of this rally is due to the fact that the stock has been depressed for a long time and this was the right type of fuel for the investment case going forward. Nitro Games is starting to build up a strong pipeline of games with different business opportunities. Similar to the case of the Nerf Game we believe a potentially significant revenue boost will come at the earliest at the end of this year.
The stock is currently traded around SEK 14 per share, close to our previous base case of SEK 12 per share. With close to SEK 30 million in cash and a market cap of SEK 120 million we believe the stock is more fairly priced today considering the future opportunities. We will raise our revenue estimates especially for 2022-2023 and our base case somewhat.