Its a Thunderful Thunderful life

Its time for another Swedish gaming IPO. This time it is Thunderful on the starting blocks, and while the deadline for subscribing to the IPO passed a few hours ago, the stock won’t start trading until the 7th December so I thought I would post the “Nikeforos” analysis before the stock starts trading (putting my head on the blocks as you might say).

The first thing to say is that I am not a professional analyst, that means that I won’t be looking at the financial statements in the same way that a traditional analyst at a broker would do. Life is too short and the markets are too crazy to make that exercise worthwhile (imho).

Secondly I am a super-sceptic when it comes to gaming IPOs, it would take a lot for me to invest in an IPO like this, even if it is one of the few that come up in the gaming sector.

Thunderful is a primarily a publisher. Its very important to understand the publisher’s position in the gaming food chain, and it is not a great one. The publisher does not create or even commission any games, but aims to build a portfolio of games and developers that it can market under its umbrella. So far so good, no different to a literary publisher. Then the publisher needs to find a distributor, Thunderful distributes through third parties, Steam (for PC titles), Nintendo, Playstation and the Xbox stores depending on the developer. It has very little ability to distribute the games itself as fewer and fewer people buy from anywhere other than the big distributors.

So Thunderful doesn’t create the games, doesn’t commission them, doesn’t own the game IP (it licences the game for publication), and can be dumped by a developer for another publisher at the drop of a hat (contract permitting). In fact the closest analogy for me would be to imagine them as a traditional agent, flogging a stable of artists around the clubs and record labels, always worrying that their successful artist would leave them for a bigger agent. And there is no shortage of other publishers ready to take on a game. Its a global playing field and US, UK, French, Finnish and Swedish publishers are all in the market for indie games to add to their portfolio, and their ranks are growing as evey medium sized developer tries their hands at being a publisher as well as a way of diversifying away from their home grown games.

The Positives: Ok, now I have got that negativity off my chest what is the upside?

Thunderful are a rare bird in this sector in that they have made a consistent profit for a number of years. This solidity is mainly due to their distribution rights to Nintendo consoles and games in the Nordic and Baltic regions which is a two-year long license to print money (runs to April 2022). This means that their initial business model was sound and could have been a fair money spinner for years to come. However that golden goose looks to be down graded in favour of a shift to owning its own IP.

Thunderful have taken a step towards the Embracer model by announcing the acquisition of the British developer Coatsink for 23m GBP (261m SEK plus earn outs for a similar sum over two years) in October just before the IPO was announced. A sum that is around a third of the amount they are raising in the current IPO, leaving them with money for more acquisitions.

This strategy will be their focus for the next three to five years, will it also be profitable? Who knows. What I do know is that this acquisition will do nothing to allow Thunderful to get closer to a presence in the mobile gaming market were they have little to no traction at all. And it will mean less focus on the core profitable businesses I mentioned earlier.

People are obviously mentioning Embracer Group (formerly THQ) as a template for success. Trading at after its IPO at 10 SEK in late 2016 it had climbed to 80 SEK in Sept 2019 when it changed name to Embracer Group, now trading in the 165-180 SEK range it is a stock that has surfed a deal of its own-generated good news, good sentiment and good flows into the sector and has been an excellent investment with even more room for growth. Can Thunderful this be Embracer2.0 ?

Well lets bang that comparison one on the head right away, Embracer group owns a most of its on IP (it makes or sponsors its own games and is not just a publisher), Embracer makes a very decent profit, Embracer is professionally run (like a proper grown-up company), Embracer is streets ahead of Thunderful in every way and will always have a supply of free money from its fund company owners who will bankroll as many acquisitions as it wants to make. It has therefor 4 years head start on Thunderful and shows no sign of slowing down.

Lets also remember that there is a down side, a pretty big one for these small companies, see my post on MAG interactive’s rise and fall for an edifying example of what that looks like.

And finally, if you want to make a reasonable amount of money over the short term then I think anyone participating is looking at a guaranteed 10-30% in the first month of trading. However what interests me is something that can generate 100% over two years for the purposes of the Nikeforos portfolio.

And over a two year period I can’t see those sort of returns. even with the best will in the world Thunderful will always come second to Embracer and any one of the other 40 or so publishers in my database with exactly the same ambitions and deep acquisition pockets. As a company I wish them well and I hope they have lots of fun going forward, however as a long term investor, I will wait a year to see whether there acquisition strategy has any merit that can be repeated.

/Richard