IGI Logo

Too many "put-and-takes

Nazara is up c.15% MTD on the back of WildWorks acquisition and Google’s decision to allow Rummy and Fantasy Sports apps on Play Store. WildWorks expands Nazara’s TAM in gamified early learning space, but does little to solve the growth puzzle. Similarly, while Google’s move is positive for the real money gaming (RMG) segment, strong networking effect implies marginal players like Nazara may not gain as much. eSports, Nazara’s largest value driver, continues to be beset by abrupt regulatory changes. Nazara has multiple (subscale) growth segments but lacks a strong core to drive synergies and put the flywheel in motion, making the long-term compounding growth narrative unclear. Lack of shareholders’ value creation by MTG, a Sweedish gaming company with a holdco structure like Nazara, is a case in point. While Nazara’s prudent capital allocation is appreciable, valuations at 7x FY24E EV/Sales and 44x EV/EBITDA (adjusted for Nazara’s share) are discounting sustained high growth. A turnaround in Kiddopia and scale-up in RMG (through consolidation of weaker players as alluded by Founder Mr Mittersain in our recent interaction) could change the growth trajectory meaningfully for us to turn positive. Absent that, we see limited visibility of organic growth; downgrade the stock to SELL with TP of INR 650 (previous TP: INR 540).

* “Play” store move: good for RMGs…: Google has allowed Rummy and Fantasy Sports apps on its play store. This opens a floodgate for new user acquisitions, likely at lower CACs. More importantly, for an industry struggling to establish its legitimacy, Google’s move is a shot in the arm. Unsurprisingly, market took notice - reflected in Nazara’s 15% up move post the news. However, note that Nazara drives only 6% of its revenues (1QFY23 annualised) from Rummy (~10% of valuation). It is up against industry leaders whose marketing budgets are 4-13x of Nazara’s Rummy revenues (Exhibit 9). Given the synchronous multi-player nature of RMGs, bigger platforms tend to attract and retain more players. That said, Nazara has the optionality to consolidate weaker players, especially in the scenario of an adverse GST verdict, and emerge as a strong contender in this space. This, although far-fetched at this stage, would turn us positive on the stock.

* and bad for eSports: On the contrary, another move by Google’s Play Store and Apple’s App Store in July this year went largely unnoticed (in terms of stock reaction). BGMI, India’s most popular eSport game with over 100mn viewers, was taken down by both the platforms. For eSports, such abrupt moves will not only dissuade new players to take up eSport professionally, but will also deter sponsorship money. On an aggregate, we believe setback in eSport more than offsets likely gains in RMG for Nazara.

* WildWorks: a solution or a bigger problem: Nazara’s recent acquisition of WildWorks is a positive due to: a) it expands the TAM for Nazara’s gamified learning segment from 2- 7 years old to 2-12 years; b) at less that 1x sales, it’s a steal. While it adds incremental revenue in the near term, it compounds the growth challenge Nazara is facing. Like Kiddopia, WildWorks is also struggling with Apple’s IDFA policy change. Duolingo’s recent results (Exhibit 2) however indicate that players with focus on product development continue to grow. We would like to see incremental focus and investments from Nazara in solving the growth puzzle to turn more constructive on this space

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer