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#1: CD Projekt’s Future Hinges on Much More than Cyberpunk’s Turnaround

CD projekt
Source: CD Projekt

Polish video game publisher CD Projekt (WSE:CDR) published its fourth quarter and full year 2022 earnings on Thursday, March 30th. Revenue grew by 7.3% in local currency year over year, while operating profit grew by 62%. This growth reflects normalization in Cyberpunk 2077 sales, the developer’s latest premium title which was initially marred by technical issues. CD Projekt has issued several major patches for the game since its December 2020 release, leading to an improved critical and consumer reception and increased sales. Revenue and profits were the second-highest in the company’s history, however well short of FY 2020’s massive haul following the game’s initial preorder boost. 

CD Projekt is best known for its CD Projekt Red subsidiary, its video game development studio responsible for creating The Witcher series and Cyberpunk 2077. The studio’s primary focus is on creating large-scale, open-world RPGs that are rich in story, character development, and immersion. CD Projekt Red was established in 2002, eight years after its parent organization, and it currently has over 1,000 employees in four studios located in Warsaw, Kraków, Wrocław, and Vancouver. 

Thus far, CD Projekt has developed or co-developed every game it has published, with the exception of The Witcher: Monster Slayer, an augmented reality title in which players become a “Witcher” and slay monsters in the real world. This game was developed by Polish studio Spokko, and it debuted on Android and iOS in 2021 to lukewarm reception. The game was removed from app stores this January and servers will go offline entirely this coming June. 

The Witcher: Monster Slayer
Source: The Verge

In addition to its development studio, CD Projekt also runs, a digital game distribution store it launched in 2008. GOG started as Good Old Games, a platform offering DRM-free versions of classic video games. Since then, GOG has expanded to offer a wide range of titles from major and independent developers, including newer games that have been optimized for modern systems. The service also features a selection of movies and TV shows for purchase, all of which are DRM-free. 

Market share metrics versus its digital distribution competitors like Valve’s Steam and the Epic Games Store are not public, but GOG was responsible for about 10% of Cyberpunk 2077 sales through the beginning of 2021. GOG provides CD Projekt with an alternate venue to sell its games without the standard 30% cut, but it is unlikely it represents a growth catalyst.

In April 2020, CD Projekt was the most valuable listed firm in Poland, accounting for 13.9% of the country’s benchmark WIG20 index. The gaming sector benefited greatly amid the turmoil of the pandemic and the lockdown environment, as areas from financial services to energy were roiled in its wake. Today, the company ranks as 13th in the index, with its market cap having fallen from a peak of $11.9 billion USD to around $2.7 billion today. This represents a 77% decline since August 2020, while the broader index is nearly flat over that period.

Source: YCharts

Going into earnings, analysts were net underweight on CD Projekt. The consensus 12-month target of 122.94 PLN was only about 9% higher than what CDR shares were trading at the day prior. Just five of the 18 analysts covering the stock had a buy or overweight rating. CD Projekt’s diluted earnings per share of 3.44 PLN handily exceeded the median estimate of 3.14 PLN, but was still within the analyst range. Despite the EPS beat, which was due to a “reduction in the costs of maintenance and updating of Cyberpunk 2077,” the company’s shares still trade at 33x TTM earnings. Estimates are likely to be revised upwards, but the valuation remains rich compared to its peers. 

CD Projekt’s fall from grace is well documented at this point, as it solely results from the botched Cyberpunk 2077 launch and the resulting fallout as the company tried salvaging the product’s long-term success. In short, the game was delayed three times throughout 2020. When it finally released, it was plagued by technical glitches so severe that Sony and Microsoft offered full refunds for those who bought the game through their respective stores (Sony also delisted the game from the PlayStation Store). On PC, where those with higher end systems were actually able to run the game as designed, players still noted the emptiness of the game’s world and the lack of meaningful content within its universe.

CD Projekt Red relies on a tight release schedule for its premium titles. Like traditional game developers that do not rely on a games-as-a-service model, revenue spikes the year of the game launch and then peters out until the next one. For example, The Witcher 3: Wild Hunt launched in May 2015, and FY 2015 was the company’s best year by revenues until FY 2020. The gap between the three releases in the Witcher Trilogy were all four years, with main line installments in 2007, 2011, and 2015. DLC also was released for The Witcher 3 later in 2015 and in 2016. 

Cyberpunk was slated to have a five-year gap, with a planned release date of April 2020, which was announced at E3 2019. But delays pushed the game’s launch into December, making the gap closer to six years. Despite all the problems at launch though, the game managed to sell 13 million copies the month it launched, more than half of which were from preorders. The real disappointment came in 2021, where the game sold just 4.3 million units the entire year, a 70% drop from the launch month. It was not a total disaster, however, as The Witcher 3 continued to sell well, helping bolster total revenues. 

Cyberpunk was supposed to feature a multiplayer mode, which would’ve boosted retention in the years after launch, but this was scrapped following the game’s turbulent launch. Paid DLC was likely to come out in 2021 as well if The Witcher 3’s schedule was followed, but instead the expansion, titled Phantom Liberty, will be coming later this year. The DLC will also be the first and only paid expansion for the game, a disappointment given the game’s potential if development resources didn’t have to be reallocated toward patches and CD Projekt Red’s future roadmap. 

Fourth quarter earnings were optimistic given that Cyberpunk sales have turned around, growing 18% from 2021 thanks in part to the game’s improved performance and also a boost from the Netflix anime Cyberpunk: Edgerunners. On Steam, 87% of reviews in the last 30 days were positive, compared to 79% positive over the game’s lifetime. The situation echoes the turnaround story of Hello Games’ No Man's Sky, a space-themed adventure survival game that initially faced criticism after its 2016 launch but has since become highly regarded after a whopping 23 significant updates over more than six years. 

CD Projekt Red’s updates to Cyberpunk have allowed the developer to partially regain the approval of its fanbase, which is perhaps more important for this studio than any other AAA developer. When a developer has such a large gap between major releases, a single bad launch could lead to the end of the business. Interest in future projects is also vital to both attracting studio talent and maintaining the momentum of existing products well enough to survive such drawn-out development cycles. 

Cyberpunk| Feedback
Source: Wccftech

These earnings also gave room for CD Projekt to reaffirm its ambitious games pipeline, which was revealed late last year. Four new Witcher games (three of which are part of an all-new trilogy), a new Cyberpunk game, and an unannounced brand new project are all in development. CEO Adam Kiciński told investors on the earnings call that Polaris is The Witcher 4, though this was then recanted as a “slip of the tongue.” 

Polaris is expected to release 2025 at the earliest, followed by the next installment in this new Witcher trilogy three years later. While gamers should take release dates from CD Projekt with a grain of salt, a three-year gap between games would be the shortest in the company’s history.

Source: IGN

Cyberpunk 2077 will not become the open-world blockbuster that investors and gamers alike thought it could be — that accolade instead goes to Elden Ring. So while 2022 proved to be a good year for CD Projekt as Cyberpunk launched for PS5 and Xbox Series X/S in February, this tailwind is unlikely to persist through 2023. Instead, investors will need to bide their time until the launch of Polaris in two years, which could be the ultimate make-or-break-moment for the company. This is a question of whether CD Projekt Red can stick to its timeline and release a bug-free experience without resorting to numerous delays. 

CD Projekt announced a partnership with Epic Games in March 2022 to utilize Unreal Engine 5 indefinitely for future titles. This is a net positive for CD Projekt and increases the likelihood that future games release on schedule. The company’s previous in-house REDengine could be tailored to CD Projekt’s bespoke needs, but resources had to be allocated towards constantly improving the engine to accommodate the next generation. Unreal Engine comes with a comprehensive suite of tools for game development, including tools for level design, asset creation, animation, physics simulation, and more. These tools can help the studio speed up the development process. 

Unreal Engine is also designed to work across multiple platforms, including PC, console, mobile, and VR. This means that CD Projekt Red can create a game once and then more easily deploy it on different hardware, which can save considerable time and resources. Aside from a handful of Witcher spinoffs, there has not yet been a main release on mobile. This could be a huge tailwind for future revenues at the company. Perhaps they can leverage a cloud gaming service like Nvidia’s GeForce Now, given the hardware limitations of current mobile devices and tablets.

Investors have reasons to be optimistic about CD Projekt’s future, but the company has lost its post-Witcher 3 momentum and now presents as a potential turnaround story — or in a worst case scenario as a cautionary tale. Even down over 70% from all-time highs, the company’s valuation remains rich on a trailing basis. But if CD Projekt can tighten its release window while delivering award-winning games, the valuation will quickly cheapen. The next minor milestone will be sales of the Phantom Liberty DLC, which will likely be priced at $20, in-line with The Witcher 3's Blood and Wine expansion.

#2: Capcom’s Great Games Lead to Great Remakes

Source: Eurogamer

While most other game developers are struggling against their 2020 and 2021 comparables, Capcom continues to post record results. The company’s FY 2022 Q3 report, which was released on January 30th, reiterated full-year earnings guidance calling for the 10th consecutive year of operating income growth. Operating profit of ¥50 billion and unit sales of 40 million are both expected to be the highest in the company’s history. Note: Capcom’s fiscal year begins April 1st and ends on March 31st of the following year.

With a 57.9% total return in 2022, Capcom has the highest annual return of the 54-member global gaming company universe that we track. The top three were all Japanese companies, and of the 12 that posted positive returns during the year, nine were Japanese. A sharp weakening in the yen boosted the nation’s stocks in 2022. Game developers and publishers selling their games in the U.S. benefited from the strengthening dollar, as the JPY/USD FX pair depreciated from 115 to 131. 

Tech stocks
Source: Koyfin

Tech stocks in the country also fared better as the Bank of Japan kept rates at -0.1% for a seventh year and inflation remained subdued, at least relative to the rest of the world. In Capcom’s case, its franchises from Monster Hunter to Resident Evil have garnered huge audiences in the U.S., among both console and PC gamers. Mobile has not been a priority for Capcom as of yet, with only a handful of Ace Attorney games available on Android and iOS along with a turn-based Monster Hunter game. According to our partners at, the company only saw $12.7 million in revenue last year from its mobile apps worldwide. 

This is set to change soon, after Capcom and Tencent’s TiMi Studio Group last fall announced a new mobile Monster Hunter game that retains the console series’ traditional formula. Existing mobile Capcom games are generally premium priced titles as well, but this new game will almost certainly be free-to-play. TiMi has said the untitled game will “reproduce the hunting actions that define the Monster Hunter series.” Monster Hunter World and its full-priced expansion Iceborne have together sold over 30 million units, making it Capcom’s most successful title ever. 

Capcom also develops arcade games and amusement equipment, which round out the company’s three segments. However, those are lower margin divisions that are forecast to only make up 11% of operating income in FY 2022. The “other” part of the business includes adaptations of its games across movies, anime, music, and merchandise. 

Source: Capcom

The impressive results in recent years are not only due to successful sequels in the core franchises. Remakes of old games, particularly those in the Resident Evil franchise, have sold millions of units. The first remake Capcom released was in 2002, recreating its PlayStation original 1996 Resident Evil game for the GameCube as part of an exclusivity deal between Capcom and Nintendo. Future remakes would come much later, with RE2, RE3, and RE4 getting remakes in 2019, 2020, and 2023, respectively. 

Every one of these remakes have sold very well. As of the company’s latest earnings, the remake for RE2 has sold over 11.2 million copies, outselling the original by 5 million units. The 2019 RE2 game received critical acclaim — it won Game of the Year at the Golden Joystick Awards and was nominated for the same category at The Game Awards 2019. The RE3 remake sold over 6 million units, twice as many as its predecessor, despite receiving somewhat less favorable reviews primarily as a result of its shorter length and lack of depth. 

The latest RE game to be remade, RE4, appears to be on track to break records. The original game was the best reviewed in the franchise, and is frequently cited as one of the best video games of all time. The original PS2 version has a score of 96 on Metacritic, putting it only behind Tony Hawk’s Pro Skater 3 and GTA III for the PS2 library. 

The game also sold more than 11 million copies, as it was broadly ported to other console hardware  given it did not fall under the prior Nintendo exclusivity deal. Given this trend of RE remakes doubling sales of their original versions, the RE4 remake could very well sell 20 million units. The game has already sold 3 million copies in the two days after its March 24th launch. For comparison, RE2 Remake sold 3 million in one week, RE3 Remake sold 2 million in five days, and RE Village sold 3 million in four days.

The all-time peak player count for RE4 of 168,000 far exceeds any other installment. Resident Evil Village, which was released in May 2021 and also has a near-perfect score, peaked at 107,000 concurrent players. It is also still early in the year, meaning the game will likely still ride the tailwind of the holiday season. Note that China, which makes up about 25% of the games market, has banned Resident Evil games for several years now over the series’ graphic violence. This ban is unlikely to change soon, but it does illustrate how impressive RE4’s player count metrics are when considering they do not even include the world’s largest game market. 

Most Played Games
Source: SteamDB

Going forward, fans are likely awaiting remakes to 2009’s RE5 and 2012’s RE6. After this however, Capcom will have to look elsewhere if they want to keep pursuing this strategy. The other two main Capcom franchises are Monster Hunter and Street Fighter, which don’t quite lend themselves to remakes in quite the same way. 

Monster Hunter games are not known for their story, and new titles improve on the formulas of the old ones with enhanced graphics. For Street Fighter, new games are intentionally prioritized over old ones, as Capcom fosters a competitive scene around the new releases. The cast also remains similar between games. As a result, Capcom may either have to turn to a less popular series like Ace Attorney or Mega Man, remakes of which will invariably result in lower unit sales than Resident Evil going off overall franchise popularity. This may lead to a ramp up of new games based on existing IP or even new franchises altogether.

Top Movers

Weekly Top Gainers
  • For the week ending March 31st, 2023: the average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was +1.8%. The S&P 500 returned +3.5% and the Nasdaq-100 returned +3.2%.
  • The first quarter of 2023 ended up being the second-best quarter of the last decade for the tech heavy Nasdaq-100. Headline inflation has declined in the U.S. from a peak of 9.1% in June 2022 to 6% in February. Interest rates have fallen across the curve as a result of multiple regional bank failures in March, and while financials have performed poorly, flows have gone into the tech sector. Furthermore the unemployment rate has remained low while wage growth has moderated, increasing the likelihood of a “soft landing.”
  • Unity (+13.0%) and AppLovin (+11.2%) led gaming stock gains this week. Both companies rely on ad revenue from applications developed using their platforms. The potential TikTok ban in the U.S. could lead to a windfall for social media stocks and app publishers, as nearly $7 billion in digital advertising spending would be unlocked.
  • Team17 Group stock fell -15.6% for the week as the company reported Q4 and full-year earnings on March 28th. The report was generally positive, as revenue in 2022 increased by 52% and gross profit increased by 53% as margins expanded by 100 bps. Investors may be concerned with the resignation of Debbie Bestwick, Team17’s CEO of five years. 

Most Notable Strategic Investments

  • South Korean video game giant Krafton purchased 10% of Polish video game studio People Can Fly. The investment came through a subscription for the studio’s recent stock offering at an above market price of PLN 40.20 per share, which prices Krafton’s stake at approximately PLN 120 million or $280 million. People Can Fly was previously owned by Epic, who first acquired a majority share in 2007 and then acquired the studio outright in 2012, renaming it Epic Games Poland. Management bought out Epic in 2015 and has since grown the business to 650 employees across eight locations, which includes three acquisitions in 2021. (Link)
  • Keywords Studios acquired Los Angeles social media agency Digital Media Management (DMM). DMM’s founder and CEO Luigi Picarazzi and COO Adam Reynolds will remain with the company. Keywords will integrate DMM into its Engage division, which provides marketing and creative services to gaming companies. The company is expanding into short-form video and social media marketing, which have become increasingly relevant this decade. The acquisition also includes Creator Lab, DMM’s software platform that pairs influencers with gaming brands.(Link)
  • NFT marketplace Magic Eden invested in Bravo Ready, an indie game studio in Quebec. The studio’s first game, multiplayer shooter BR1: INFINITE, is currently in closed beta. The game is unique in that it requires users to pay to spawn in, with a kill-to-earn mechanism rewarding players in SOL. Like the majority of Magic Eden’s NFTs, BR1 is built off the Solana network, while most other play-to-earn games leverage Ethereum. This acquisition comes one month after Magic Eden laid off 15% of its staff as part of a company-wide restructuring effort. (Link)

Most Notable Venture Financings

Source: Hathora
  • Hathora raised $6.7 million in seed funding to build a platform that simplifies the tech stack for multiplayer games. The company was founded last year out of New York and has been in stealth until now. The Hathora platform hosts game servers within its cloud and allocates computing power depending on the title’s needs. This lowers the barrier for entry for new multiplayer developers, who are able to scale a game without dealing with complex infrastructure. The team notes that Hathora can also be used for real-time applications like chat apps and delivery tracking apps. (Link)
  • Croatian gaming services provider GameBoost raised €2 million to expand into new markets. GameBoost launched in 2022 as a marketplace for services including Elo boosting, account purchasing, and coaching within competitive multiplayer games such as League of Legends and Valorant. This third round of funding for the company was led by Croatian VC fund Feelsgood. (Link)

Other News

Source: Club386
  • E3, the largest trade show for the video game industry, has been canceled again. The show was supposed to be held at the Los Angeles Convention Center, but almost all of the major publishers ultimately pulled out of the event. E3 was held virtually in 2021 but has not existed in-person since 2019. The COVID-19 pandemic accelerated the trend toward virtual events, with many companies successfully hosting digital showcases in 2021 and 2022. Publishers have been able to debut new games with their own events in a more tailored environment free from live demo glitches and slip-ups from presenters. (Link)
  • Axie Infinity creator Sky Mavis is expanding its Web3 offerings by partnering with four new studios. These partners — Directive Games, Bali Games, Tribes Studio, and — will develop games on the company’s Ronin blockchain network. While some games will be based on the Axie universe, most won’t be connected to the popular title. The studios are developing games across genres, with Directive Games’ multiplayer shooter The Machines Arena currently in beta on PC. (Link)
  • Our partners at released their State of Mobile Gaming 2023 report, which covers the mobile games landscape in 2022. Last year, there were 90 billion game downloads, up 8% from the year prior. Spending within games shrunk by 5% year over year to $110 billion. The top title worldwide by downloads was endless runner game Subway Surfers, while the game with the highest consumer spend was TiMi’s Honor of Kings. (Link)

A big thanks to Mario Stefanidis, CFA for writing this update! If Naavik can be of help as you build or fund games, please reach out.

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