CD PROJEKT share price performance will now largely hinge on the ability to reignite sales of Cyberpunk 2077 following the game’s return to the PlayStation Store – said Vladimir Bespalov, VTB Capital Research analyst
Obrazek użytkownika Piotr Rosik
22 cze 2021, 07:00

CD PROJEKT share price performance will now largely hinge on the ability to reignite sales of Cyberpunk 2077 following the game’s return to the PlayStation Store – said Vladimir Bespalov, VTB Capital Research analyst

“Sales of around 6-7 mn copies for FY21 will be a relatively neutral outcome for the CD PROJEKT stock. If we see sales below this level, this might put more pressure on the stock” – urges Vladimir Bespalov, VTB Capital Research analyst.

Piotr Rosik (Investors Zone): Despite the disappointing financial results for the first quarter of 2021, as well as the cut off of the right to dividend, the CDR price did not fall below PLN 150. Is this the end of the sale of Cyberpunk 2077 shares? Apparently, Cyberpunk on the new consoles is a completely different game than on the old ones. Maybe the course already discounts high sales on PS5?

Vladimir Bespalov (VTB Capital Research): The price level of PLN 150 looks like a local floor for the stock at the moment. However, the share price performance will now largely hinge on the ability of CD PROJEKT to reignite sales of CP 2077 following the games return to the PlayStation Store in on 21 June. I think that there will be a period of uncertainty about sales over the next several months due to limited information available to the market and the stock will trade sideways during the period. Once we hear more about sales, the stock’s performance will largely depend on the reported sales trend.

In my view, sales of around 6-7 mn copies for FY21 will be a relatively neutral outcome for the stock. If we see sales below this level, this might put more pressure on the stock. Meanwhile, sales above this level are likely serve as a positive trigger. The increase of the stock of new-gen consoles and the release of the game version for new-gen consoles might help, but this is likely to happen closer to the end of this year and early next year, in my view.

How do you evaluate the CDR results for the first quarter and what are your estimates for whole year 2021 and 2022? The results show the enormous dynamics of the increase in administrative costs - can you justify it somehow?

The 1Q21 results were weak, although they hardly came as a surprise to me. The key pressures came from relatively weak sales of CP 2077, on one hand, and costs related to fixing CP 2077, as these costs could not be capitalized, on the other. The company explained the increase in the general and administrative costs by higher spending on research and prototyping for the future projects as well as stock-based compensation expenses. These should moderate in subsequent quarters, in my view, which would provide us with a better picture of the underlying trends.

My FY21 forecasts imply that revenues will be down 40% YoY to PLN 1,283mn, ETBITDA will decrease 41% YoY to PLN 842mn, EBIT will drop 37% YoY to PLN 731mn and net profit will shrink 43% YoY to 659mn.

The new incentive program - in view of the recent results and the behavior of the share price - will have little chance of being implemented. Can this fact have any impact on the activities of the management board?

The recently approved incentive program looks very ambitious, given the recent trends. My forecasts imply that the company will not be able to meet the financial performance targets, even for the base-case scenario. I think that hypothetical chances of meeting the targets of this program largely depend on two potential developments:

  1. CD PROJEKT’s ability to give a strong boost to CP 2077;
  2. a successful release of another game (most likely The Witcher 4) before the program expires.

However, the risks are on the downside, in my view. Still, I do not expect that this would have any impact on the activities of the management, which looks committed to turn CP 2077 around and ensure the continuing development of the company.

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Listening to the presentation of the company's new strategy gives the impression that the management board said “nothing happened”. So why did investors react so panically, the share’s prices fell almost 10% after its announcement?

In my view, the strategy presentation was somewhat disappointing, as it provided little insight into CD PROJEKT’s plans and the pipeline of future projects in particular. Moreover, the company’s decision to limit the discussion of it’s plans by just one year ahead hardly helped visibility. The other disappointing development was the decision to replace the development of a Cyberpunk multiplayer by just online elements. These were likely the reasons behind the stock’s decline on the back of the strategy presentation.

Did you expect changes in the management board or supervisory board after the disastrous premiere of Cyberpunk 2077? One of the shareholders of CD Projekt, British Abri Advisors, sent a letter demanding the resignation of the entire management board of the Polish studio. "Even if you wanted to, you won't make as many mistakes as these guys," Jeffrey Tirman, CEO of Abri told Bloomberg. Do you understand such speeches, do you agree with them, can they have any effect? Should the CDR management really suffer the consequences of C77's image failure?

The management suffered some reputational damage from the bumpy release of CP 2077 amid high expectations. It is difficult to discuss any potential changes to the management team, as shareholders determine these. Still, I assume that the same key people would continue to steer the company through current challenges.

Do You think that the lawsuits that investors have directed towards the management board and CD PROJEKT company have any chance of success?

I am not in a position to comment on potential outcomes of legal actions.

In your opinion, will the company continue to disappoint so much in the revenue side in the results for the second quarter and will the negative cost trends related to the increase in general administrative expenses and operating expenses persist?

I think that sales of CP 2077 before the return of the game to the PlayStation Store on 21 June would remain quite weak. From this perspective, much will depend on how much of the pent-up demand from Pay Station gamers will be unlocked at the end of June. On the cost side, I expect some moderation of cost pressures, including general and administrative, compared with 1Q21. Based on these considerations, I think that the 2Q21 results might feature some sequential improvement in terms of both revenues and margins.

The company paid a dividend of PLN 5 per share. Do you think that the company should establish some dividend policy or can CD PROJEKT be considered a mature entity in terms of business?

The global games market implies many opportunities to grow business for the companies like CD PROJEKT. This means that reinvesting profits to take advantage of these opportunities makes perfect sense. The planned simultaneous development of two titles from 2022 will require higher investments. Moreover, the company is looking into potential M&A deals to boost its expertise. CD PROJEKT’s cash flow profile is rather lumpy and largely linked to major releases. Therefore, establishing a formal dividend policy is still pre-mature, I think.

When will be the time for it?

In my view, once CD PROJEKT transforms itself from a company of just two franchises into a company of at least four or five major franchises, with its cashfows becoming much smoother, establishing a formal dividend policy might make more sense. Overall, I would not treat CD PROJEKT as a mature business now.

Before the premiere of Cyberpunk2077, CD PROJEKT was compared to Take Two Interactive - is this comparison still valid after the premiere of Cyberpunk?

Such comparisons with other game companies were based on high expectations for CP 2077. However, CD PROJEKT failed to meet those expectations, at least for now. Overall, CD PROJEKT remains much slimmer in terms of franchises and it still needs to breathe new life into CP 2077.

Were You very disappointed and surprised with what CDR did with the Cyberpunk version for old consoles? CD Projekt is now spending time fixing bugs, instead of working on the multiplayer version and the next part of The Witcher ... Is the Cyberpunk 2077 multiplayer version at all real?

The performance of CP 2077 on old-gen consoles was a disappointment. Bug fixing and game optimizations clearly distracts resources and delays the work on other project. Based on the company’s recent comments, it decided to add online elements to CP 2077 rather that develop a multi-player version. My understanding is that this new approach does not imply a release of a standalone multiplayer version, but rather a gradual enrichment of the game by multiplayer elements.

As we mentioned The Witcher - what do You expect from the fourth part? Will the announcement reverse the negative sentiment towards CDR stocks? When will the company present new part of the Witcher and when do You think there is a realistic date of the premiere?

The Witcher 4 is still quite far away from now, in my view. I would expect its release to happen around 2025, with the company starting to unveil details closer to that date. Therefore, I do not see the game as a strong driver for the stock in the near term.

Do you predict the success of The Witcher: Monster Slayer mobile game? Maybe the second season of the Netflix series will contribute to it’s success?

The Witcher: Monster Slayer could be a success, but it is still more an experiment for CD PROJEKT. I would not expect any strong impact on CD PROJEKT’s financials from this game. The first season of Netflix series provided strong support to sales of The Witcher 3, so the second season might also prove helpful for games based on the Witcher universe, including Monster Slayer.

Do You take into account the activities of GOG at all in your valuations? The management board has long-term plans related to this activity, are they realistic in the current market situation?

I do take into account the activities of GOG in my financial forecasts and valuations. Still, I think it is unlikely to be a strong value driver for CD PROJEKT in the coming years. I believe that value creation at CD PROJEKT will largely be driven by the development of its Witcher and Cyberpunk franchises.

Thank You.

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