M&A strategy

The M&A strategy is to build a portfolio of companies where each investment should have a positive business case based on future cash flow. The company does not take synergy effects into the calculation which fits with the operational approach to run the companies (studios) relative independent. And fits approach of earn-outs based organic growth.

Embracer recognizes that the value of the total portfolio is larger then the sum of its parts, also when they are not integrated. With a slower M&A pace since end 2022, the company should be able to focus on that value creation. Embracer has become a powerhouse with a lot of valuable IP. At the moment the market does not recognize the value of the portfolio since Embracer as a company is valued below the sum of the acquired portfolio.

Games portfolio

Embracer has a large portfolio with 224 games including 31 AAA. >90 games are scheduled for release in 2023/2024.

Prognose 2022/2023

In the report for Q3'23 the company reiterated adjusted EBIT 8.000-10.000Mkr for 2022/2023 and 10.300-13.600Mkr for 2023/2024 guidance. The given span results in 100% growth within 1-1.5 years. The delayed partnerships announced 28-03-2023 are interpreted in the market as a profit-warning for the upcoming 2022/2023 report.

Lars Wingefors founder and CEO owns 21% of the company (with a market cap of 60Bkr). He has is still leading the company from his home town Karlstad where it all started as a collectors hobby.

Negative sentiment

2021-2022 market sentiment was negative with concerns about the high level of M&A activities, lack of organic growth, delayed releases of AAA games and a bit of critics on released AAA. March'23 FT published an article with short seller comments, and at the same time Embracer announced a delay in contracting partners from Q4'22/23 into Q1'23/24. This resulted in a 15% drop of the share price (28-03-2023).

Short arguments

Short sellers arguments are that the company has acquired too many businesses over the past years. It is hard to see the organic growth and the quality of the business. The financial reporting is unclear and does not give a good picture of the underlying business, especially with focus on adjusted EBITDA. Short seller expectation is that the company is not sufficient stable and has a risk to get into trouble with a down-turn.

Talent leaving

After the acquisition game studios are merged into operating companies within the Embracer group. The operating companies have a large degree of freedom, and are mostly managed by experienced founders of previously acquired companies. Within the operating companies the studios also have a large degree of operational freedom. The business model helps to keep talent. There is a however a risk that founders leave when lock-ups end. Given the high M&A rate in the past years the risk is increasing.

Declined margins

In 2023 the gross margin declined with 20% from >85% to 67% compared to 2022. This also impacted the EBITDA margin that declined from 40% to 18.4%.