Starbreeze Q2'25: The contrarian case remains - for now

Starbreeze delivered Q2 revenue and EBIT below our expectations, primarily driven by softer PAYDAY 3 (“PD3”) and third-party publishing (“3PP”) revenue, as well as a higher cost base than expected. No concrete details or news around a more thorough PD3 outlook or advancements with potential partners for Project Baxter were revealed in the report. The company did, however, communicate down prioritizing focus on 3PP in favor for the PAYDAY franchise, in-house projects, and work-for-hire. This, together with the Q2 outcome, has led us to revise our near-term estimates down, with smaller changes to our long-term forecasts. Despite this, we still feel the very low expectations on both PD3 and the Baxter release reflected in the current valuation, present an opportunity to be a contrarian. As such, we reiterate our Accumulate recommendation but lower the target price to SEK 0.22 (was SEK 0.26).

Q2 headline figures were below our estimates

Starbreeze’s Q2 revenue amounted to 54 MSEK, which fell clearly short of our estimates (65 MSEK). While the work-for-hire contribution exceeded our forecast, the revenue miss was mainly driven by softer PAYDAY-related sales and a weaker-than-expected contribution from the 3PP title Roboquest following its platform expansion. PAYDAY 3 revenue was particularly soft at 18 MSEK versus our 30 MSEK estimate. We acknowledge, however, that our assumptions may have been too front-loaded regarding the timing effect from the acquisition of full publishing rights, which enables Starbreeze to retain all PD3-related revenue going forward. We think the reported quarter largely reflected the previous revenue-share structure with PLAION, and that PD3 revenue would have been higher if the new structure had been in place from the beginning of Q2, as we had anticipated. Adjusted EBIT amounted to -17 MSEK, which was well below our estimated 9 MSEK. The shortfall was driven not only by lower revenues but also by higher direct costs (game amortization and development expenses) and OPEX compared to our forecast. On the balance sheet, the cash position increased by 26 MSEK to 156 MSEK, mainly due to delayed game-related cash inflows from Q1 as well as the 33 MSEK directed share issue completed in Q2.

Strategic refocus drives changes to revenue mix estimates

After the Q2 report and management’s comments on deprioritizing 3PP in favor of greater focus on the PAYDAY franchise, in-house projects, and work-for-hire, we have revised our estimates. Our PAYDAY-related revenue estimates for FY25 have been cut by 15%, with smaller reductions across the remaining forecast period. We continue to view a significant resurgence in the player base and revenues as unlikely. Following management’s comments and refocus, we have substantially lowered our 3PP revenue estimates, while raising our expectations of the contribution from the KRAFTON agreement this year. In addition, we now also assign some probability to future work-for-hire revenues, which had a modest mitigating effect on our reduced 3PP estimates. Following the Q2 results, we have also increased our direct cost estimates and, to a lesser extent, OPEX. Coupled with the downward revisions to revenue, this had a negative impact on our profitability forecasts.

We remain cautiously optimistic about the stock

Following our estimate revisions, we arrive at a DCF value of SEK 0.38 (was SEK 0.44). However, our DCF value reflects a moderately optimistic scenario and should be viewed with caution. We still believe the DCF provides limited near-term support, as the share price remains closely tied to the performance of PD3s (and PAYDAY IP in general), which remains soft, and the upcoming Baxter release, where visibility is still low. That said, we continue to see underlying value in the PAYDAY IP, and the recent publishing rights deal gives Starbreeze more levers to pull than before, with a more detailed plan for the franchise yet to be shared. However, given the current low absolute valuation and reduced cash flow pressure enabled by the KRAFTON work-for-hire agreement, we continue to believe that Starbreeze could be an interesting, albeit high-risk, investment over the next 12 months.