Remedy Q3'24: Long-term potential is building

Translation: Original published in Finnish on 11/4/2024 at 8:05 am EET.

The company's Q3 results were well above expectations and the game projects in development are progressing well. However, the sales performance of Alan Wake 2 has been disappointing compared to our expectations, and the company now has something to prove during the crucial sales months at the end of the year. With these recent decisions, Remedy's current game projects are now on track and funding for their development has been secured. The self-publishing of future games will significantly increase Remedy's long-term royalty potential, making the current valuation of the stock look attractive. In the short term, however, the weaker sales performance of AW2 and uncertainty about the success of FBC: Firebreak may keep the stock under pressure and do not support a stronger view. Therefore, we reiterate our Accumulate recommendation and revise our target price to EUR 19.0 (was 21.0 EUR). 

Q3 figures well above expectations, disappointing AW2 sales performance

Remedy’s Q3 revenue grew by 129% to 17.9 MEUR which clearly exceeded our 14.2 MEUR estimate. This growth was driven by the expected retroactive development payments for Control 2 under the Annapurna agreement, which nevertheless came in above our expectations. Due to Remedy's fixed cost structure, the revenue beat was also directly reflected in the bottom line and Q3 EBITDA (6.6 MEUR) was well above our forecast of 1.2 MEUR. However, contrary to our expectations, Alan Wake 2 had not yet recouped its production and marketing budget, and the comment about covering more than 80% of the costs was repeated. We lowered our royalty expectations for the game quite a bit, but we still expect the game to recoup in Q4, when the second DLC, the release of the physical game version, the planned discount campaigns and an otherwise strong sales season (Halloween and Christmas) will support sales.

The next few years' milestones for game projects in development are starting to become clear

Remedy's strategic decision to self-publish Control 2 and FBC: Firebreak will require more investment from the company in the coming years but will increase long-term royalty potential. Remedy's current cash position (Q3'24: 31.2 MEUR) and the 15 MEUR raised from Tencent through a convertible bond provide, in our view, sufficient headroom Meanwhile, for FBC: Firebreak, the agreements with Sony and Microsoft to bring the game to subscription services on these platforms immediately upon release next year limits the financial risks associated with the game (we assume 10 MEUR of revenue from these) and provides a potentially flying start to the game's player numbers. Control 2 is also on track for full production next year, according to the company, and our 2027 release date estimate looks realistic. The Max Payne subcontracting project in production is also progressing well and will provide Remedy with good cash flow from the post-release royalty option (we estimate 2026). The big picture of our forecasts remains unchanged, and we see the potential for the company to deliver significant long-term earnings growth through the development of new Alan Wake and Control games.

The long game is tempting, even with cross-drive in short-term drivers

We believe in Remedy's ability to create more quality and successful games in the long term, which makes the current valuation of the stock attractive. However, in the short term, the valuation (EV/S 4x) is elevated and a key driver (AW2 royalties) is below expectations, which could keep the stock under pressure. The general sentiment in the gaming sector also remains rather gloomy. However, the release of FBC: Firebreak is approaching, and this will be a clear driver for the stock over the next year. However, the success of Remedy's first multiplayer project remains to be seen. Thus, before seeing the success of FBC: Firebreak, it is worth proceeding with caution with further purchases while the release of Control 2, which is the key to value creation, is still several years away.