Tag: DEVO

Devolver Digital Inc (LON:DEVO) 2021 results demonstrate the strong growth potential ahead of the business. We estimate Devolver delivered 32% organic growth in 2021, well above peers. This positions the company well for 43% organic growth in 2022, driven by a rebounding game release schedule. Devolver’s exceptional growth potential is not factored into its valuation multiples, in our view.

Results ahead of our forecasts: 2021 revenue and EBITDA are expected to be over c. $99.5m and c. $25.0m, respectively, ahead of our original forecasts of $94.5m and $23.9m. We estimate Devolver grew revenue by an impressive 32% excluding acquisitions, ahead of our estimate of 26% growth. EBITDA margin is expected to rise to c. 25%, up from and adjusted margin of 22% in 2020. We raise our 2021 revenue estimate by 6% and EBITDA by 5%.

Strong back catalogue growth: Growth was mostly driven by the back catalogue, as expected. Back catalogue revenue is expected to be c. 70%, up from 61% in 2020 and in line with our estimate of c. 71%.

Growth driver switches in 2022: In contrast to 2021, the majority of growth in 2022 should be driven by new release revenues. (See revised revenue bridge overleaf.) Devolver plans to release 16 titles in 2022 compared to only 8 in 2021, as the company catches up on new releases after partly focusing on Fall Guys in 2021. In addition, the company plans to release a major new title, Shadow Warrior 3, which has a budget more than triple the company’s average.

Growth above peers: The strong 2021 trading update supports Devolver Digital’s growth outlook, which is well ahead of peers. We conservatively forecast revenue grows 43% organically in 2022, supported by a deep and diverse pipeline of over 30 high potential games. Their recent game launches have progressed well and received strong reviews. On the Steam platform, five of the company’s six releases since H1 2021 have received “Overwhelmingly Positive” or “Very Positive” reviews and its average title received 89% positive reviews. (See overleaf.) Over 90% of the company’s games are profitable and the company has achieved 5.5x ROI to date (3.1x excluding Fall Guys).

Valuation: Despite Devolver Digital’s exceptional growth potential, its shares trade at only 26x EV/ EBIT 2022, in line with UK peer group median. In addition to its stronger growth outlook, the company offers more diversified game exposure, a higher rated game portfolio and a pioneering management team: 1) They were named 2021 Publisher of the Year, Indie Publishing Awards, by Gamesindustry.biz, the leading video games industry website. 2) The company has the highest career average Metacritic score (75) amongst a group of major Indie publishers. 3) Their 11-person core senior management has over 250 years of relevant experience.

Devolver Digital Inc (LON:DEVO) is an award-winning, high-profile video game publisher and developer that consistently publishes highly-rated indie games and is backed by industry pioneers: 1) Devolver was named 2021 Publisher of the Year, Indie Publishing Awards, by Gamesindustry.biz, the leading video games industry website. 2) Devolver has the highest career average Metacritic score (75) amongst a group of major Indie publishers. 3) Devolver’s 11-person core senior management has over 250 years of relevant experience. In 2020, Devolver released Fall Guys, a megahit that generated $150m in sales and $70m of EBITDA in FY20 before the publishing rights were sold to Epic Games in March 2021.

Winning formula: Devolver has a highly differentiated philosophy and culture that has driven a virtuous cycle of success. Over 90% of the company’s games have been profitable and the company has achieved 5.5x ROI to date (3.1x excluding Fall Guys). The company was founded on the principles of treating developers fairly and prioritising their creativity and brand. The company focuses on nurturing innovation and supporting developers with one of the most experienced teams in the industry. They have a market leading track record of highly-rated games that attracts distributors and increases the discoverability, longevity and profitability of their games.  Similarly, Devolver’s track record of success and fair and transparent terms attract increasingly high quality developers. Also, its reputation for hiring industry veterans attracts further top talent in virtuous cycles. The company offers developers access to multi-decade relationships with distributors, market leading social media reach and proven ability to scale.

High growth and diversification: Revenue grew 33% CAGR 2016-2019 and then jumped 262% in 2020, boosted by Fall Guys. Similarly EBITDA grew 36% CAGR 2016-2019 and then jumped 620% in 2020. The company’s revenues are broadly diversified. Its top five titles contributed 42% of sales in 2020 and its back catalogue of around 90 titles contributed to at least 60% of sales in the last three years.

Forecasts: The company has a deep pipeline of over 30 high potential games. We conservatively forecast revenue grows 26% organically in 2021 and 51% in 2022 as the company catches up on its release schedule after Fall Guys. We expect to see revenue per new title rise since Devolver is planning a bigger-budget release and increasing investment in development, distribution and marketing. The company recently made five acquisitions and plans to strategically acquire when there is a fit and earnings accretion, using  IPO proceeds and listed shares.

Valuation: Devolver’s shares offer significant value, in our view. While shares trade at 21x EV/ EBIT 2022, below the UK peer group median (25x), the company’s sales growth (26% CAGR 2021-23 like-for-like) is well above the peer median (18%). In addition to a stronger growth outlook, They also offer more diversified game exposure, a higher rated game portfolio and a pioneering management team.