Remedy: Stronger potential not reflected in valuation

Translation: Original published in Finnish on 11/20/2024 at 8:00 am EET.

Remedy hosted a Capital Markets Day on Tuesday, the recording of which can be viewed here.  Over the years, Remedy has demonstrated its ability to develop games of very high quality, but this has not yet been reflected to the same extent in their commercial success for the company. After years of work, the company has built the capabilities and resources for a more frequent, even annual, pace of new game releases in the 2025-2030 strategy period. Thanks to self-publishing, their financial success will continue to be strongly reflected in Remedy's figures, and in the event of a possible hit game, the potential is very significant. We believe that the current valuation of the stock provides an attractive risk/reward ratio to tap into the long-term potential of the company's ongoing game projects and its own game brands (Alan Wake and Control). We reiterate our EUR 19.0 target price and raise our recommendation to Buy (previously Accumulate).

Targets for sustainable profitable growth by the end of the decade

Remedy aims to double its 2024 revenue by 2027 and grow steadily thereafter. The EBITDA margin is targeted to reach 30% by 2027, and profitability is set to remain at least at this level until the end of the strategy period (2025-2030). With our revenue estimate of 48.6 MEUR in 2024, the target level would represent a rough revenue range of around 90-100 MEUR. To reach the objectives, Remedy focuses on: 1.) creating and growing world-class gaming franchises, 2.) making distinctive category-leading games, 3.) working in ways that enable successful productions, and 4.) self-publishing games owned by Remedy.

We believe that the 2027 revenue target is achievable if the company's games in development perform well/very well. Remedy's minimum target for each project is still 100% return on investment, and a hit game could be many times that figure. If the revenue target is broadly met, profitability will also be on target and, in a good scenario, there is potential for significant improvement. In our projections, the successful launch of Control 2 in 2027 is particularly critical to the targets. Thanks to self-publishing, the game's revenue potential is very significant for Remedy if the game's popularity exceeds that of the already successful first Control game.

Maintaining high year-on-year revenue and profitability beyond 2027 was an ambitious target compared to our previous assumptions. The company commented that it aims to release one new game per year starting next year, making the target achievable in our estimation if the games are successful. A pace of one game per year sounds fast in historical terms, but Remedy has made great strides over the years in operating a multi-project model, developing its own game engine and other technologies, and growing its organization and resources to a size sufficient to work on multiple projects simultaneously. In this regard, the company also revealed that there is a new, 4th game project in early conceptualization behind the scenes, which, with an efficient development pace, could be released in 2028. In this way, we estimate that the game/year target would be achieved in 2025-2028.

Current valuation allows to play the long game with an attractive risk/reward ratio

We believe in Remedy's ability to create multiple high-quality and successful games over the long term, which, when viewed against the growth and profitability potential, makes the current valuation of the stock (2025e EV/S 2.8x) attractive. The long-term potential is also reflected in the value implied by the DCF model, which now stands at
EUR 25.6.