I get you, but see all acquisitions will not work out right. Kiddopia did and Animal Jam too. I see Nazara as a junior Tencent and they too run on acquisitions too. So if they want to grow, they need these acquisitions. But hopefully going forward, further acquisitions can be attained through internal accruals
Can you tell more about Tencent growing on acquisitions?
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Nazara is pretty much a holding company at this point, as they no longer develop in-house gaming titles. They just keep jumping from one acquisition to another. Most game publishers globally talk about their upcoming releases, but Nazara talks about acquisition targets.
The problem with this M&A playbook is that they have to keep acquiring companies all the time to show growth because casual mobile games have a short shelf life. What is popular today might not be played by even 50% of those users 3 years later. Revenue of the fairly popular Animal Jam has declined from $18.6 million in CY2020 to $11.4 million in FY24.
Canāt really compare Nazara to Tencent. Gaming industry in China is at a whole another level with one mobile game making $2 billion annual sales. Although Mittersain constantly talks up the āfuture potentialā of gaming and esports in India in every podcast and interview, the promoters sold a large chunk of their stake near the 52-week low.
I randomly checked a few casual mobile game companies listed in US, Korea, China and Japan and they all trade at very low earnings multiples and understandably so.
Disc: had invested last year and exited a couple of months ago with small gains. Sum of all parts valuation didnāt really make sense anymore.
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Yes, I agree, it is a holding company.
Game studios and publishers abroad have a steady pipeline of games.
I wouldnāt hold Animal Jam against them, it was pandemic time and people flocked online. Now itās back to work for everyone. My problem with Nazara is that itās not strong in any one sector - games, publishing or another. There is no core anymore.
There is future potential but that potential right now lies with Korean and US gaming studios (Krafton, Minecraft)
Disclosure - was invested in 2021, not since. Made a a good small profit then.
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Animal Jam registered $20 million in revenue in CY2019, so the revenue decline cannot be attributed to the COVID effect. Itās just that even the most popular casual mobile games gradually become obsolete. This is my biggest gripe with their acquisition playbook. The fact that Animal Jamās former owners went ahead and sold their company at less than 1x P/S is telling in itself.
There is definitely some potential with Nodwin as esports is becoming mainstream, but thatās about it as far as Nazaraās portfolio is concerned. Pretty much everything else runs on a freemium/ad-based model. Given the negligible ad rates of India and a general unwillingness among Indians to purchase casual mobile games or in-game items, it is no wonder that Nazaraās top games Kiddopia and Animal Jam generate revenue mostly from the US.
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Yes, ad rates here are paltry. Even Sportskeeda realised this and now focuses on US sports. Cricket being the exception, the volume brings in the money.
Nazara has made a distinct India and international strategy.
As a market itās difficult to make revenues from gaming in India unless you have a super popular title like BGMI which actually makes upto 1800 crores from in app purchases. All other game titles hardly make anything (for example: Nazaraās nextwave game studioās popular game WCC 3 which is yet to make a material impact on its financials). However real money gaming companies have made good revenues in India as they have been able to monetise well by charging platform fees, with several companies like Dream11, games 24x7 etc making sizeable revenues. In this market as well the fantasy gaming makes bulk of the revenues followed by card games (rummy bigger than poker) among others. The natural trajectory for any gaming market is to make more money from real money before it transitions to making majority of the money from game titles through in app purchases. India however will not see that happen before FY30. Apart from this E sports is making good progress through monetisation opportunities though it is in nascent stage in India and other real life gaming centres/arcades also making good revenues through bowling, go karting etc which also will evolve into a good funnel for AR/VR gaming apart from becoming centres to host mini E sports tournaments.
Looking at it in totality, Nazara in India is now changing its strategy beginning with Nazara Publishing entering into deals with most well known games globally/AAA titles to publish them for the India market. This will provide them a good traction and revenue potential. They have also entered the real money gaming company with moonshine which owns PokerBaazi (60% market share of online poker in India) apart from consolidating in rummy in the future through their existing company open play which runs classic rummy. Fantasy gaming in India is still dominated by dream 11, which also corners bulk of the revenues in real money gaming, but its very difficult to break into this market. Nazara should in fact consider itself lucky it could get its hands on PokerBaazi because of the industry reset with 28% GST as it had missed the bus in sector with its conservative approach (in hindsight their conservative approach also looks smart with the government actions!). They are however yet to acquire majority stake here by converting their convertible share options in PokerBaazi, because they are probably waiting for the tax liability to be set aside by the Supreme Court which has been a long pending action point. Nazara is also on the verge of acquiring SMAAASH entertainment, with NCLT approval pending for them as they have already emerged as a successful resolution applicant. This is a good asset with decent revenues and profit and nazara may get lucky by acquiring it at a decent discount. SMAAASH already has an inhouse team that develops AR/VR games though it is not that advancedā¦ this asset can have synergies with their Esports vertical and can also become good conduit to tap customers for the future AR/VR gaming titles whenever the company gets into that more aggressively. Lastly on the E sports vertical at Nazara through Nodwin gaming has actually surprised everyone on the upside though there is a long way to go with value of their media rights yet to fetch attractive prices. Nodwin has also diversified extensively into multiple geographies and is looking to start operations in South America, Africa, Middle East, Central Asia and South Asia. They have also got into too many tertiary businesses in music events, comedy etc apart from merchandising and D2C brand wings for headphones which is now de-consolidated. Many of their acquisitions and assets here may not give the desired outcomes and many may have to also be written off like in the case of wings. I donāt understand e sports business fully yet and though it remains quite attractive with huge potential for upside as media rights become valuable when you look at what has happened in other developed countries, investors must be prepared for minor hiccups on the wayā¦ Their sportskeeda business however has been the dark horse and performed much better and consistently than anyone expected. They have made many smaller acquisitions and have recently diversified into entertainment genre (soap central) beyond gaming and sports. As it continues its play book it is already amongst the top 5/6 sports destinations in the US and is a good source of cash flows for nazara.
When it comes to international strategy, Nazara has decided to acquire profitable game studios which have already developed successful titles which have a potential to further be scaled up. They have also acquired a digital marketing company called datawrkz which helps all its game studios with user acquisitions. Even this business had suffered a slight setback with the loss of large low value external client but will be back to the growth path from FY26. It is however important to note that Nazara has paused its stake in Datawrkz at 33% and not yet reached 51% even though they exercise control. Amongst the successful game studios targeting international markets, Nazara is a large player in gamified early learning platforms like Kiddopia and Wildworks. Though Wildworks will have a low profitability for the next few quarters, because a lot of money is now being spent in marketing after improvements in the product after acquisition of the company. Kiddopia is however a mature product but incremental investments in marketing here are not yielding higher profitability so the business is being operated at steady state of profits even if there has been loss in subscriber numbers. This game is planned to be turned around gradually with a revamped marketing plan and a licencing strategy where Nazara will reach out to popular IP holding companies like Disney and integrate their characters in its kiddopia game which will lead to organic growth of subscribers and increased profitability with limited marketing investment. Though there are improvements planned for this divisions which will start reflecting from Q3 of FY25, the real benefits of IP licencing strategy will be only visible from FY26 Q1 (guidance to double Kiddopia business in 3-4 years). Nazara is trying to replicate its licensing strategy for Animal Jam as well apart from acquiring a new company recently called Fusebox which already operates on an IP licencing strategy. Fusebox licences popular TV show IPs like Love Island and Big Brother so they get a lot of organic subscribers and have low marketing budgets. These games are targeted at major developed markets and makes money through in app purchases. Nazara acquired fusebox in P/S ratio of less than 2 and the company has good profitability with ebidta of 20%. Itās a smart acquisition of a high profitable and fast growing company which can be scaled up quite well as they launch new games going forward. This same strategy will be applied to buy more established game studios and scale them up further. Nazara is further looking at studios which can bring in new technologies like AR/VR, web3 which can grow profitably and further give them access to sunrise sectors within gaming. The new round of fundraising of 900 crores is likely to partially fund PokerBaazi acquisition, apart from buying SMAAASH, publishing investments and other international studios with growth potential for scaling up revenues and profits.
Overall I look at Nazara is company in its early days of evolution and a good proxy bet on the gaming sector. It has good and experienced management which is financially prudent. The company has multiple optionalities and is poised to grow at a rate exceeding 20-25% for many years to come with good increasing profitability and cash flow. All the headwinds facing the company are temporary and fixable and it is trading at an attractive valuation when considering the many upsides that are not priced into the stock. A good H2FY25 is expected by the company. Even the guidance of an EBITDA of 300 crores (3x from today) by FY27 is most likely to be overachieved.
Happy to discuss further and hear all your inputs on my analysis.
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Guidance of 300 is by start of Fy27 or end of Fy27 ? I am assuming itās end but just wanted to clarify
By the end of FY27 is the official guidance, but in all probability they should exceed the guidance so you may even get 300cr ebidta by beginning of FY27. For context - they donāt consolidate the results of PokerBaazi yet because they havenāt converted their convertible shares to get majority. PokerBaazi is already at 400cr sales (40% of nazara if we consider around 1140cr for fy24) and an ebidta of 40cr. PokerBaazi is growing at a CAGR of 50%. Recent acquisitions especially fusebox are also yet to properly reflect in the numbers as it was consolidated only in late August. Fusebox generally has strong H1, but even if we take a conservative estimate the company may close this calender year with 160cr of sales and only 50cr of revenue with an ebitda of 20% may be consolidated. But for FY26, you can imagine not only 160cr of sales and 32cr of ebitda but also a jump on this base due to further growth (fusebox is on trend to grow 100% in FY 25 over FY24) and also launch of a new game based on Big Brother TV show, which can give a further substantial upswing. Further acquisitions in nodwin of freaks4u and in adtech of space and time apart from acquisitions in sportskeeda (deltias, soap central and return to growth of pro football network) will certainly end up in much higher growth and ebidta in FY25 and more noticeably in FY26 itself. Also itās important to remember that kiddopia is likely to return back to a growth path in FY26 from Q1 as the licensing of IP based characters is expected to be closed and start yielding results (guidance on kiddopia is to double revenues in 3-4 years from Q2 FY25 onwards mentioned at the time of Nazara upping its stake from 51% to 100% in kiddopia). I know itās a lot of moving parts but the company has further raised funds of 900cr to invest in more profitable studios in the west like Fusebox and acquire technologies like web3 and AR/VR apart from diverting the funds to complete the acquisition of SMAAASH through the insolvency route along with investing significant sums to enter publishing of AAA titles in India, which in itself is a good revenue generation possibility. You can all see there are enough and more triggers for revenue and ebidta to grow substantially and in all likelihood to surpass the guidance of 300cr ebitda by end of FY2027 if not much earlier
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Any thoughts on potential company ownership changes and continued acquisition of companies?
disclosure: tracking position
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